FBIAS™Fact-Based Investment Allocation Strategies for the week ending 10/23/2015

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 26.2, up from the prior week’s 25.7, 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 57.59, up from the prior week’s 56.80, 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 27, up substantially from the prior week’s 21.  Separately, the quarter-by-quarter indicator – based on domestic and international stock trend status at the start of each quarter – gave a 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:

Friday’s 157 point gain in the Dow Jones Industrial Average marked the end of a strong week on Wall Street.  The Dow gained over 430 points to close at 17,646.  The Nasdaq surged over +2.9% ending the week back above the psychologically-important 5000 number at 5031.  The LargeCap S&P 500 added +2.07%.  However, the gains were concentrated in the LargeCap space, as the S&P 400 MidCap index gained only +0.38% and the SmallCap Russell 2000 rose an anemic +0.32%.  A particularly weak September job gains number is believed by some market watchers to have been the death knell for a 2015 interest-rate increase, and the interest rate cut by the People’s Bank of China added to the buying rush.

In international markets, Canada’s TSX gained +0.84% to close at 13953.  Much bigger returns for the week were found in Europe, where Germany’s DAX vaulted over +6.8%, followed by France’s CAC40 jumping +4.7%.  The United Kingdom’s FTSE gained +1.04%.  In Asia, Japan’s Nikkei gained +2.92% and China’s Shanghai Stock Exchange rose a more modest +0.62%.     

In commodities, Gold declined more than -$14 to $1,162.80 an ounce.  Silver likewise declined -1.27% to $15.83 an ounce.  A barrel of West Texas Intermediate crude oil declined more than -6.5% to $44.60 a barrel.

In US economic news, jobless claims remained near their recent lows as initial claims rose only 3,000 to 259,000 last week.  Analysts had expected a reading of 265,000.  There were 2.17 million continuing claims, while the 4-week moving average of claims reached a 15-year low of 2.184 million.

Housing starts for September came in at an annual rate of 1.206 million in September, which was the second strongest monthly reading since 2007 and well above expectations.  Starts were +17.5% higher versus a year ago.  On the other hand, new construction permits fell -5% at 1.1 million, missing expectations.  This may indicate a slower pace of building in the future.  Existing home sales were up +4.7% last month to an annual rate of 5.55 million according to the National Association of Realtors.  That was the second highest reading since 2007 and handily beat estimates of 5.35 million.  Mortgage and refinance applications both jumped for the week, too, up +11.8% and +16.4% respectively.  More good news on the housing front came from the Homebuilder Confidence reading from the National Association of Home Builders, which jumped to a new decade high in October.

The early reading on October US manufacturing activity, the “flash” Purchasing Managers Index (PMI), saw its sharpest pickup in new business conditions since May.  The reading increased nearly a point to 54.0, beating estimates of an unchanged reading.  Strong output was mostly driven by demand from the domestic US market.

The Conference Board’s US Leading Economic Indicators (LEI) fell -0.02% in September to 123.3.  Expectations had been for a flat reading.  The September reading suggests that growth will continue but at a tepid pace—around +2.5%, according to the Conference Board.

In Canada, wholesale shipments fell -0.1% in August, missing expectations of a slight gain.  Canada’s economy continues to struggle with the effects of low oil prices.  However, retail sales rose +0.5% in August, beating expectations.  The yearly gain increased to +2.8% suggesting better growth for the 3rd quarter.

In the Eurozone, The European Central Bank left rates and its bond buying program unchanged, as expected.  ECB President Mario Draghi suggested an increase in bond buying would be considered in December.  He stated that monetary policy alone wouldn’t be enough to spur the Eurozone to stronger growth.  ECB Governing Council member Ewald Nowotny stated that fiscal policy must become looser.  Previously fiscal policies were “restrictive”, and are now “neutral”, but there may be a need for it to become “expansive”, he was quoted as saying. 

Eurozone construction output declined -0.2% in August.  Building was down 0.2% during the month, and civil engineering fell 0.3%.  Construction activity has remained relatively weak along with the broader Eurozone economy.  Consumer sentiment also lost ground as October’s reading slipped to -7.7 from -7.1.  This was the lowest reading since January.  Germany, struggling to get even a little inflation in its economy, reported that producer prices fell -0.4% last month, more than expected.  The yearly decline now stands at -2.1%, the biggest year-over-year reading since January.  Excluding energy, which fell -1.1%, the producer price index was still down 0.1%.

In China, GDP grew at an annualized rate of +6.9% in the 3rd quarter.  That’s slightly below the official target of +7%, and the slowest rate of GDP growth since 2009.  Industrial production missed expectations, increasing only +5.7% versus last September.  Retail sales rose +10.9% versus last year, matching expectations.  The People’s Bank cut interest rates for the 6th time in a little less than a year and relaxed reserve requirements for banks making China’s stimulus levels the most accommodative since the financial crisis. 

Finally, this past week Italian luxury sports car maker Ferrari had its initial public offering priced at $52 a share, under the ticker symbol RACE.  However, Ferrari’s IPO was one of the declining number of IPOs in the current bull market.  According to Dealogic data, to this point in 2015 just 153 deals have been brought public, versus 242 at this same time last year, and 173 the year before.  The cooling in the IPO market is attributed by analysts to a disconnect between company expectations and current market reality.  Supermarket chain Albertson’s wished to raise $1.95 billion through a public sale of stock last week, but delayed its IPO until later this month or next.  Volatile markets, marked by a steep sell-off in late August, have led potential investors to demand better prices from the companies aspiring to go public.  Also not helping the IPO market is the fact that this year’s overall IPO returns are negative.  Renaissance Capital estimates that half of the companies that have gone public this year are trading below their IPO price, and even more are trading below their “first trade” prices (the price assigned to the public IPO-buyer not in on pre-trade share allocations).  In the case of Ferrari, the first-trade price was $60, yet Ferrari closed the week at $56.38, meaning that all public buyers of the IPO at the “first trade” price are under water already.

(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 9.8 from the prior week’s 11.3, while the average ranking of Offensive DIME sectors fell to 13.5 from the prior week’s 11.3.  Despite the market gains of the week, the Defensive SHUT sector have regained 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,

FBIAS™ Fact-Based Investment Allocation Strategies for the week ending 10/16/2015

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 25.7, little changed 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 56.80, up from the prior week’s 53.97, 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 21, up substantially from the prior week’s 15.  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 major US benchmarks were mostly up for the week, with the LargeCap S&P 500 index adding to its gains from the previous week, up +0.9% to 2033.  The Dow Jones Industrial Average gained 131 points ending the week at 17,215, a rise of +0.77%.  The NASDAQ continued its run to regain the 5000-level, up +1.16% to 4886.  The SmallCap Russell 2000 diverged from its larger counterparts, ending the week down -0.26%.  The Nasdaq remains the only major US index with a gain year-to-date, but the losses have narrowed considerably.

In international markets, weakness prevailed in most European markets, while gains were the rule in Asia.  Canada’s TSX declined -0.9%, the United Kingdom’s FTSE gave up -0.59%, and Germany’s DAX was nearly flat up +0.08%.  China’s Shanghai Stock Exchange surged +6.54% and Hong Kong’s Hang Seng gained +2.7%.  But South America continued to show weakness with Brazil’s Bovespa index plunging -4.26%.

In commodities, Gold had its second week of gains, up +$21.80 to $1177.40 an ounce.  Silver had its third week of gains, up +1.33% to $16.03 an ounce.  The industrial metal copper pulled back slightly from last week’s large gain, down -0.74%.  A barrel of West Texas Intermediate crude oil declined -3.56% to $47.73 a barrel.

In US economic news, new unemployment claims fell 7,000 to 255,000 last week, matching July’s 42-year low.  Analysts had expected 270,000 claims.  The numbers seem to indicate a continued tightening in the labor market, but actual hiring activity has been tepid, leaving net job growth fairly weak.  There were 5.4 million job openings in August, down from the all-time high reading of 5.7 million in July.  Hires rose slightly to 5.08 million, quits also increased slightly.  Counterintuitively, economists consider higher numbers of “quits” to be a good thing – it is a sign that workers are more confident they’ll find another job.

Consumer prices dropped the most in 8 months as prices slipped -0.2% last month compared to August.  Energy fell -4.7%, and is -18.4% versus a year earlier.  The core CPI, which excludes food and energy, rose +0.2%.  The total CPI was unchanged versus a year earlier, while core CPI was up +1.9% versus last year.  The core CPI is getting close to the Federal Reserve’s 2% target, but policymakers have been hinting that rate hikes are off the table for the remainder of 2015.

US exports fell -6.2% for August versus a year earlier, the fastest decline since 2009.  Manufacturing has been hit especially hard according to recent activity gauges that have shown stagnation or outright decline.  Caterpillar announced huge layoffs last week as it faces weak demand for its heavy-construction and mining equipment.  DuPont also referred to overseas weakness in its earnings warning.  U.S. exports are not alone–China’s exports fell -5.5% versus a year earlier and South Korea suffered a -14.9% plunge.  The strong dollar has had the dual effect of stifling demand for U.S. goods and making other countries’ trade look weak in dollar terms.  Whether it has triggered a manufacturing recession is not yet known, but is increasingly discussed as a real possibility.

US Small business owners were more optimistic last month according to the National Federation of Independent Business (NFIB), although sales outlooks weakened.  The NFIB’s small business optimism index rose +0.2 point last month to 96.1—still historically below average.  In the report, finding qualified labor continues to be a growing concern.  Over 15% of smaller firms say finding qualified workers is a growing problem, up from just 9% a year earlier.  Finding qualified workers is the number 3 overall worry of small business owners, following taxes and government regulations/red tape.

Retail sales disappointed in September, rising only +0.1%.  Had it not been for the launch of the iPhone 6s, retail sales would have fallen.   The Producer Price Index (PPI) slid -0.5% in September, the biggest decline in 8 months and worse than the -0.2% drop expected.  Core PPI, which excludes food and energy, still retreated -0.3% versus expectations of a +0.1% increase.  Year over year, wholesale prices have fallen -1.1%. 

Industrial production decreased -0.2% in September, better than the -0.3% decline expected, but its second straight decline nonetheless.  Production was +0.4% higher versus a year ago.  Manufacturing declined -0.1%, less than expected, and was +1.4% higher than this time last year.  The energy slump that began last year continues to impact production.  Capacity utilization, which measures slack in firms’ industrial equipment, fell slightly to 77.5% from 77.8%.  Regional Fed measures of manufacturing in Philadelphia and New York were both in contraction territory, though slightly improved from the prior month.

In Canada, manufacturing sales declined -0.2% in August, much better than the -0.7% loss analysts expected.  This reading followed a +1.7% surge in July.  For the year through August, sales were down -0.6%.

Europe continues to flirt with deflation, despite the European Central Bank’s intensive Quantitative Easing (QE) activities intended to spark activity – and inflation.  In Germany, September consumer prices fell -0.2% vs. August and were flat versus this time last year.  Wholesale prices declined -0.6% versus August and down -1.8% versus this time last year.  In the United Kingdom, consumer prices fell -0.1% from August and down -0.1% from this time last year.  Core CPI was unchanged from the previous month and rose +1% versus a year earlier.

In Asia, China’s September trade balance was $60.34 billion, up slightly from August and much higher than the forecast of $46.79 billion.  In dollar terms, imports tumbled more than -20% versus a year earlier after falling over 13% in August.  Exports fell -3.7% versus this time last year.  The import and export figures signal weakening Chinese demand for raw materials and weaker global demand for Chinese finished goods. 

Finally, this past week the Misery Index hit a 59-year low.  Created in the 1970s by economist Arthur Okun, the Misery Index attempts to capture the “misery” felt by a country’s citizenry.  The Misery Index is the sum of the unemployment rate and the inflation rate, and sits today at its lowest level since 1956.  The index is created by adding the unemployment rate to the inflation rate over the last year.  The Misery Index used to be significant and widely quoted, particularly when the US was suffering from “stagflation”.  Jimmy Carter used it in his campaign against President Gerald Ford in 1976, and in the “what goes around comes around” vein, Ronald Reagan then used it very effectively against then-President Carter in 1980, famously asking “Are you better off than you were four years ago?”

But in today’s economy, the Misery Index doesn’t seem to capture the “misery”, concerns and worries of the current time.  The economy presently enjoys a low unemployment rate and almost no inflation.  Despite this apparently obvious good news, a recent NBC News/Wall Street Journal poll reported that a whopping 62% of Americans say the country is on the wrong track.  High underemployment, weak wage growth, widening of the wage-gap, government dysfunction, and a seemingly amoral corporate culture (see recent drug-price gouging examples) are possible reasons for the apparent divergence between the presumably good numbers and their perception.  In any event, it seems the Misery Index doesn’t capture the angst of the current age!

(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 slightly to 11.3 from the prior week’s 11.5, while the average ranking of Offensive DIME sectors rose again to 11.3 from the prior week’s 13. The Defensive SHUT sector has given up its lead over the Offensive DIME sectors, and the two groups are now tied.   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 10/9/2015

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, up from the prior week’s 24.8, 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 53.97, up from the prior week’s 51.81, 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 – are in “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 15, up sharply from the prior week’s 7.  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 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:

Stocks recorded their biggest weekly gains in several months as investors became more confident that the Federal Reserve would not raise interest rates for the remainder of the year.  The small cap Russell 2000 (+4.6%) and Mid Cap 400 index (+4.07%) outperformed their large cap counterparts.  The Dow Jones Industrial Average regained the 17,000 level up over 600 points for the week.  The S&P 500 gained over +3.2%.  The tech heavy Nasdaq was the laggard up “only” +2.6%.

In commodities, Gold rose $18 to end the week at $1,155.60.  Silver gained +3.8% to end the week at $15.82 an ounce.  The industrial metal copper also recorded a strong gain, up over +3.1%.  A barrel of West Texas Intermediate crude oil skyrocketed more than +8% to $49.49 a barrel.

In US economic news, first time unemployment benefit claims fell by -13,000 to 263,000 last week, according to the Labor Department.  The reading is close to the 3 ½ year low set earlier this summer.  Analysts had expected 271,000 new claims. 

Home prices rose by +6.9% in August versus a year earlier, and +1.2% versus July, according to industry watcher CoreLogic’s Home Price Index.  CoreLogic is also predicting a further +4.3% rise in home prices over the next 12 months.  Home price appreciation in New York, Los Angeles, Dallas, Atlanta, and San Francisco remain strong.  Also in housing, mortgage applications surged +25% amid worries about new mortgage regulations and the possibility that the Federal Reserve may boost interest rates.  The Mortgage Bankers Association reported that refinance applications surged +24% and purchase applications rose +27%.  The applications were filed just before significant changes to the Truth in Lending Act and the Real Estate Settlement Procedures Act (known in the industry by the jaw-breaking acronym “TILA-RESPA”) took place on Oct 3.  The changes require, among other things, that lenders disclose all of a loan’s details at least three days before closing.  The changes went into effect on Oct. 3.

The Institute for Supply Management’s (ISM) US nonmanufacturing index fell -2.1 points in September to 56.9, slightly lower than expected but still above the neutral 50 as services continue to remain largely insulated from global economic concerns.  The new orders index fell -6.7 points to 56.7, the lowest level since early last year.  The employment gauge picked up +2.3 points to a strong 58.3.  The ISM nonmanufacturing reading follows a disappointing ISM manufacturing index, which fell to a barely-positive 50.2 as was reported here last week.

The US trade deficit rose sharply in August, attributed to weakness in exports and a surge in Apple iPhone imports.  The trade gap widened +15.6% to $48.3 billion in August.  It was the 2nd biggest imbalance since March 2012.  Overall imports rose +1.1%, but exports sank -2% versus last month and -6.2% versus a year earlier—the worst reading since October 2009.

Former Federal Reserve Chairman Ben Bernanke stated he sees no reason to raise interest rates as service sector growth slowed and overall global activity continues to weaken.  Ex-Fed chief Ben Bernanke told CNBC he sees no reason for central bank policymakers to increase interest rates right away “Easy money is justified” because inflation is so low.  He also highlighted last Friday’s weak jobs report.

In Canada, caution and restrained expectations for prices and sales dominated the Bank of Canada’s Q3 Business Outlook Survey.  No firms reported higher sales from this time last year, down 12% of firms in July.  Planned investments rose slightly, but were far short of last year’s readings.  The Canadian Central Bank sees the economy as on a “slow upward turn”.  Canada’s unemployment rate increased to 7.1% in September from 7.0% in August.  Canada added 12,000 jobs to its payrolls last month, while the labor force participation rate remained steady at 65.9%.  Inside the numbers, however, the balance between part-time and full-time jobs was not good.  Part-time positions rose +74,000 while full-time positions fell -61,900 (the steepest decline since October 2011).  The weakness in oil continued its damaging effects.

In the United Kingdom, the Bank of England kept interest rates at a record low of 0.5%.  The Monetary Policy Committee voted 8-1 to keep rates unchanged, citing cost pressures in the labor market that it said were rising too slowly.  The BoE expects inflation to remain below 1% until spring ’16.  British rates have remained steady for more than six years.

In the Eurozone, the composite Purchasing Managers Index (PMI) fell to 53.6 in September, down -0.7 point.  Employment grew for the 11th straight month.  The European Central Bank confirmed that it was committed to fully implementing its 60-billion-euro a month quantitative easing program at least through September of next year, according to the minutes of the ECB’s Sept. 2nd and 3rd meeting.  Emerging markets and China along with the oil market were mentioned as risks to “price stability”. 

Germany is still growing, however its composite PMI fell to 54.1 from 55.  Backlogs and job creation were the strongest since 2011.  German factory orders dropped an inflation-adjusted -1.8% following a -2.2% drop in July, whereas forecasts had expected a modest rebound. 

Finally, we’ve all heard of “bandwidth hogs” – applications, programs or people that consume an outsize portion of total available internet capacity.  Some internet providers have loudly complained that they feel like they are working for – but not getting paid by – Netflix and YouTube.  Indeed, as the chart below shows, those two “bandwidth hogs” have accounted for a steadily-increasing proportion of total internet consumption over the last few years, breaching the 50% level for the first time this year.  (note: the “HTTP” and “SSL” slices represent plain vanilla internet browsing).  One of the surprises in this chart is how the peer-to-peer file-sharing application BitTorrent has fallen off over the past few years – now just 2.5% of total bandwidth use.  At one time, BitTorrent was the #1 bandwidth-consuming application on the internet, topping 40% in 2009.  But because BitTorrent was widely used to illegally share movie and music files, it came under concentrated and relentless attacks from movie and music industry groups who vowed to defeat it.  The legal attacks by the industry groups were largely under the rights granted them by the Digital Millennium Copyright Act, but it is widely accepted that the industry groups also conducted very successful guerrilla warfare, as well.  It is rumored that the industry groups planted defective movies and music everywhere in the BitTorrent network, making the user experience so poor that demand largely dried up.  Resourceful, if not entirely kosher!

(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 slightly to 11.5 from the prior week’s 11.3, while the average ranking of Offensive DIME sectors rose sharply to 13 from the prior week’s 17.8. The Defensive SHUT sectors’ lead over the Offensive DIME sectors is now very slim, at 1.5.   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 10/2/2015

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 24.8, up from the prior week’s 24.5, 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 51.81, up a little from the prior week’s 51.12, 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 – are in “correction” territory (10% or more from their highs).

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) turned Negative on September 25, after being Positive since August 26.  The indicator ended the week at 7, down from the prior week’s 13.  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 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:

The major market indexes were mixed as worries over China’s economic slowdown and potential new rules in drug pricing gave way to a strong Friday afternoon rally that allowed many indexes to regain positive territory for the week.  The Dow Jones Industrial Average gained 157 points for the week to close at 16472, a +0.97% advance.  Large caps fared the best as the LargeCap S&P 500 gained +1.04%.  The MidCap S&P 400 declined -0.15%, and the SmallCap Russell 2000 declined -0.77%.  Recent sector losers – particularly Biotech, Energy and Basic Materials – all rallied hard into the end of the week.  Whether these turnabouts are dead-cat bounces or genuine bottoms will not be known for a while.

In international markets, Canada’s TSX declined -0.29%.  In Europe, France’s CAC 40 lost -0.49%, Germany’s DAX gave up -1.4%, while the United Kingdom’s FTSE gained +0.34%.  In South America, Brazil’s Bovespa Stock index rallied +4.9%, after being deeply oversold and deep in “Bear” territory.

In commodities, silver added +0.93% to end the week at $15.23 an ounce.  Gold diverged from silver and lost $7.90 for the week, closing at $1137.60 an ounce despite a gain of $24.90 on Friday.  A barrel of West Texas Intermediate crude oil gained +0.71% to $45.66 a barrel.

For the month of September, losses were booked in every market segment, but LargeCaps did better by far than SmallCaps.  While the LargeCap Dow only lost -1.47% in October, the SmallCap Russell 2000 dropped -5.07%, cementing its position as the US market laggard at the ¾ marker of the year 2015.  International investors were not spared any pain, either, as Developed International retreated -4.42% and Emerging International slipped 3.13% (with Brazil leading the Emerging category to the downside, plunging -11. 78%).  Gold and Oil were also down for the month, but by lesser amounts than many recent months, at -1.80% and 7.61%, respectively.

The 3rd Quarter looked like a larger version of September, with losses across the board.  Like September, the LargeCap Dow and S&P indexes lost the least, at -7.58% and -6.94% respectively, while the SmallCap Russell 2000 lost the most, at -12.22%.  Canada’s TSX was in between, at -8.56%.  Developed International lost -9.72%, but that looks good compared to Emerging International, which sank -17.26% during the Quarter. Brazil, the worst of the category in September, was also the worst of the Emerging group for the 3rd Quarter, losing a whopping 33.02%.

In US economic news, Friday’s Non-Farm Payrolls (NFP) report was the biggest single economic piece of news of the week.  Nonfarm payroll jobs added in September were 142,000, nowhere near the 203,000 consensus estimate.  The Labor Department reported that the official unemployment rate remained unchanged at 5.1%.  The labor participation rate fell to just 62.4% — a 38-year low.  Global economic weakness and a stronger dollar were cited as reasons for the decidedly poor numbers.  The report was perceived as reducing the chance the Federal Reserve will raise interest rates this month.  Last month, the Fed held off on raising rates citing global economic concerns, and those concerns were not allayed by any news since then – and most certainly not by the NFP report.  Nonetheless, New York Federal Reserve President William Dudley stated that the Federal Reserve will likely raise rates this year, as the effects of cheaper oil and a stronger dollar play out.  He reiterated that the Fed remains data-dependent, and that the hike could even come at this month’s meeting.

US factory orders fell -1.7%, worse than the consensus estimate of a -1.3% decline.  Durable goods orders fell 2.3%.  Ex-transportation, orders fell -0.8% in August.  Consumers spent more than expected as incomes strengthened and inflation remained tame.  On Monday, the Commerce Department reported that personal incomes rose +0.3% in August, just slightly below the +0.4% gain expected.  Spending was stronger than expected with a +0.4% gain in August.  Core inflation rose +0.1% in August, which is 1.3% higher versus a year ago.

Mortgage applications fell -6.7% last week, according to the Mortgage Bankers Association.  Applications to purchase were down -6% and applications to refinance fell -8%.  Home sales declined as contract signings fell 1.4% in the National Association of Realtors Pending Home Sales Index.  This vastly missed expectations, which had been for a +0.5% gain.  The West was the only region to see a gain in August home sales.  The Federal Reserve is hoping a rebound in housing will offset the current decline in manufacturing activity in the United States.  Home prices in the S&P/Case-Shiller index declined -0.2% in July.  The 20 city index rose +5% for the year, slightly missing expectations.  Dallas, Denver, and San Francisco continue to see the strongest price gains.  Overall, prices remain about 12% below 2006 peaks, even while higher prices have been constraining more robust growth in the market.

Consumer confidence improved as the Conference Board’s sentiment gauge jumped to 103 from 101.3.  Expectations had been for a continued decline to 96.  The “present situation” component of consumer confidence increased to 121.1 from 115.8, but the “future expectations” component declined a half point to 91.

The Institute for Supply Management (ISM) Manufacturing Index fell -0.9 point to 50.2, the lowest since May 2013 and just barely above the 50 dividing line between expansion and contraction.  ISM’s export orders gauge remained at 46.5, matching the worst reading since July 2012.  The Chicago Purchasing Managers Index (PMI) fell into contraction at 48.7 from 54.4.  Forecasts had been for a slight downturn, but that the index would still remain in expansion (i.e., above 50).  It was the PMI’s fifth time below 50 in 2015 and an accompanying note said “the speed of the September descent is a source of concern.”  The reading follows other regional contraction-level readings in New York, Philadelphia, Richmond and Texas.

In Canada, industrial producer prices declined -0.3% in August, beating expectations of a -0.5% decline.  For the year, prices are -0.4% lower, led by a -14.8% plunge in energy prices.

In the Eurozone, a tiny bit of recent inflation has turned back into deflation.  Consumer prices went negative in September, falling -0.1% versus a year ago.  It was the first negative reading in the six months since the ECB launched a bond buying program.  Expectations had been for an unchanged reading. 

Germany’s PMI was revised downward in September to 52.3.  The average PMI for the months comprising the third quarter was 52.5, the strongest reading in more than a year, but the lower reading for September indicates a slowdown in momentum heading into the fourth quarter.

Finally, the general perception among many investors is that the place to find growth is in the Emerging Markets, which presumably are expanding more rapidly than their developed-world counterparts.  Sometimes, this is a correct perception – such as during the Bull Market running from 2003 to 2007.  However, it has most definitely not been true for the last couple of years.  In fact, growth has turned to contraction in many Emerging Market countries, and the Manufacturing PMI readings for Emerging Markets have fallen sharply into the sub-50 contraction territory.  Stock prices, too, have reflected this unhappy state, with most Emerging Markets indexes lower than their levels of 5 years ago.  This chart, from Markit, shows that the Emerging Market Manufacturing PMI is now at a 6-year low and back to the same level reached in Q2 of 2009 when Emerging Markets were first exiting from the Great Recession.

(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 11.3 from the prior week’s 9.3, while the average ranking of Offensive DIME sectors rose to 17.8 from the prior week’s 18.3.  The Defensive SHUT sectors still have a lead in rankings 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™Fact-Based Investment Allocation Strategies for the week ending 9/25/2015

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 24.5, down from the prior week’s 24.9, 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 51.12, down from the prior week’s 52.74, 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 – are in “correction” territory (10% or more from their highs).

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) turned Negative on September 25, after being Positive since August 26.  The indicator ended the week at 13, down from the prior week’s 16.  Separately, the quarter-by-quarter indicator – based on domestic and international stock trend status at the start of each quarter – gave a positive indication on the first day of July for the prospects for the third quarter of 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 newly rated as Negative.  The quarter-by-quarter indicator gave a positive signal for the 3rd quarter:  US equities were in an uptrend at the start of Q3 2015, sufficient to signal a higher likelihood of an up quarter than a down quarter. 

In the markets:

Stocks ended the week lower despite what some saw as a pep talk by Federal Reserve Chair Janet Yellen, who said that global growth is strong enough to withstand turmoil in emerging markets and elsewhere.  Most of the major stock indexes ended the week in the red.  The Dow Jones Industrial Average gave up 69 points to close at 16314.  The Nasdaq composite lost 140 points and ended the week at 4686.  The LargeCap S&P 500 declined -1.36%, the MidCap S&P 400 index lost -1.75%, and the SmallCap Russell 2000 was the worst of the US indices at -3.49%. 

International markets were also mostly down.  Canada’s TSX declined -1.97%, Germany’s DAX was down for a second week, losing -2.3% (and now in Bear territory, more than 20% lower than its high).  France’s CAC 40 similarly declined -1.22%.  In Asia, Japan’s Nikkei also declined a second week down -1.05%, while China’s Shanghai composite declined only fractionally at -0.18%.

In commodities, a barrel of West Texas Intermediate crude oil gained +$0.02 to $45.34 a barrel.  The price for an ounce of gold increased +$6.40 to $1,145.50, a gain of +0.56%.  Silver declined -0.36% to $15.10 an ounce.  Copper has now entirely reversed its huge surge two weeks ago, declining -4.14%. 

In US economic news, the economy expanded +3.9% in the second quarter’s final estimate.  That’s up +0.2% from the earlier estimate and a healthy rebound from the first quarter’s puny +0.6% gain.  Exports, residential and non-residential fixed investment, and state and local government spending all increased.

On the jobs front, there were 267,000 initial claims for unemployment last week, an increase of 3,000 but still below estimates of 275,000.  There were 2.142 million continuing claims, about the same as last week. 

The US housing market showed signs of weakness as sales of existing homes declined -4.8% to an annual rate of 5.3 million in August, according to the National Association of Realtors.  Forecasts had been for a rate of 5.5 million.  Compared to last year, existing home sales are still up +6.2%.  Prices were +4.7% higher versus a year ago.  The Federal Home Finance Agency (FHFA)’s price index rose +0.6% in July as house price gains accelerated.  FHFA’s index, which includes only mortgages guaranteed by Fannie Mae or Freddie Mac, stands just 1.1% below its 2007 peak.  Contrary to existing-home sales, new-home sales ran at an annual rate of 552,000 in August, beating expectations of 515,000, and are +22% higher than year-ago levels. 

Retail reporting service Redbook reported that same-store sales rose +0.9% versus a year ago last week.  This was a sharp deceleration from the +1.7% annual gain the previous week.  New orders for durable goods also disappointed as orders dropped -2% in August, matching forecasts.  Ex-transportation, orders were flat, which missed estimates of a 0.3% gain—and down 3.9% versus this time a year ago.  Manufacturing has suffered as energy producers hold back on capital expenditures.  Core capital goods orders, considered a proxy for business investment plans, dipped -0.2%. 

Bloomberg’s most recent weekly reading of consumer confidence increased +1.7 points to 41.9, the highest reading in a month.  Consumers’ views of their personal finances rose to the highest level in 2 months.  Likewise, the University of Michigan’s consumer confidence reading for September rose +1.5 point to 87.2, beating expectations but still the weakest reading since last October.

The US Purchasing Managers Index (PMI) for factory output remained unchanged at 53, the lowest reading since October 2013.  Output rose at a slightly faster pace in September, but new business, and employment weakened.  The employment component was the weakest in 15 months.

The Richmond Fed’s regional factory index hit a 32-month low and fell into contraction to -5 in September, down from zero.  Expectations had been for a gain to three.  The worst component was new orders, which plunged to 12, a bad sign for future activity.  Manufacturing has struggled with a stronger dollar, which makes US exports less attractive.  The Chicago Fed’s National Activity Index declined to -0.41 in August from 0.51.  All 4 categories within the index declined. 

In Canada, wholesale sales were flat in July, missing expectations of a +0.7% rise.  Machinery, equipment, and supplies rose +1%, but sales of construction, forestry, mining and industrial machinery fell -3%.  Canadian retail sales rose +0.5% in July, missing expectations of a +0.8% gain, but the third straight monthly rise nonetheless.  Sales growth was driven by motor vehicle and parts, clothing and accessories. 

In the Eurozone, the September composite PMI from Markit ticked down to 53.9 from 54.3, but that closed out the best quarter in four years.  New orders were at a five month high and order backlogs improved, signaling probable higher future economic activity.

The Asian Development Bank (ADB) said that the Chinese economy will grow less than its government’s 7% target this year, and that the country’s slowdown could ripple throughout Asia.  The ADB forecasts growth of 6.8%, down from 7.2%.  China’s factory PMI from Caixin is now at a 6 ½ year low, declining -0.3 point to 47.  Output, new orders, new export orders and employment gauges all declined at faster rates.

Finally, this week we take a closer look at the declining fortunes of “the world’s factory” — China.  Unlike other Purchasing Managers Index (PMI) readings around the world, in China the PMI readings are from two sources: the official state-issued PMI, and the Caixin PMI.  The difference between them is that the official state-issued version covers state-owned and very large enterprises, whereas the Caixin version is a gauge of nationwide manufacturing activity that focuses on smaller, medium-sized and privately-owned companies. 

As seen on the chart below, both the state-issued and the Caixin PMI values show declines year-over-year, but the Caixin PMI has fallen hard and fast in the last few months.  Both are now in the sub-50 area, signaling contraction.  The Caixin version is now lower than the state version by a very significant 2+ points, indicating greater trouble in the small-medium-private sector…or perhaps indicating misrepresentation by the Chinese government in the state-issued version.

(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 9.3 from the prior week’s 8.8, while the average ranking of Offensive DIME sectors fell to 18.3 from the prior week’s 17.  The Defensive SHUT sectors still have a lead in rankings 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™ Fact-Based Investment Allocation Strategies for the week ending 9/18/2015

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 24.9, up slightly from the prior week’s 24.8, 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 52.74, down from the prior week’s 53.18, and continues in Cyclical Bull territory.  Several of the world’s major markets have entered Bear territory, most notably China and Brazil, while many of the world’s other markets – including some US indexes – are in “correction” territory (10% or more from their highs).

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) has been Positive since August 26, after having been Negative since May 6.  The indicator ended the week at 16, up from the prior week’s 11.  Separately, the quarter-by-quarter indicator – based on domestic and international stock trend status at the start of each quarter – gave a positive indication on the first day of July for the prospects for the third quarter of 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), all major equity markets are in Cyclical 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 positive signal for the 3rd quarter:  US equities were in an uptrend at the start of Q3 2015, sufficient to signal a higher likelihood of an up quarter than a down quarter. 

In the markets:

Stocks closed the week mixed, as initial exuberance over the widely anticipated (in)action of the Federal Reserve quickly dissipated.  The Dow Jones Industrial Average lost -48 points on the week, ending at 16,384.  The interest-rate sensitive Dow Jones Utility Average, however, surged +2.83%.  The tech-heavy Nasdaq remained nearly flat, up +4 points to 4827.  The large cap S&P 500 ended the week down only -0.15%.  The small cap Russell 2000, more insulated from the shocks in the global economy, actually gained +0.48%. 

In international markets, Canada’s TSX ended a 2 week down streak by closing up +1.38%.  The United Kingdom’s FTSE closed down -0.22%.  On mainland Europe, Germany’s DAX ended down -2.05%, and sits perilously close (at 19.9%) to the -20% level marking “bear” territory, while France’s CAC 40 declined -0.28%.  In Asia, China’s Shanghai index declined -3.2%.  Japan’s Nikkei also ended down for the week, losing -1.06%. 

In commodities, Gold ended a 3 week down streak by gaining +2.8%, finishing the week at $1,139 an ounce.  Silver also gained, rising +3.87%.  A barrel of West Texas Intermediate crude oil gained $0.54 to $45.32.

In US economic news, the news that overshadowed all other news was that on Thursday the Federal Reserve left interest rates near zero, saying ‘global economic and financial developments’ may curb economic growth and inflation.  Federal Reserve policymakers stated that “economic activity is expanding at a moderate pace.  Household spending and business fixed investment have been increasing moderately, and the housing sector has improved further; however, net exports have been soft.  The labor market continued to improve, with solid job gains and declining unemployment.  On balance, labor market indicators show that underutilization of labor resources has diminished since early this year.”  Stocks were volatile, with the Dow rallying +190 to a session high 45 minutes after the announcement, but by the close that gain had been erased, and the Dow settled negative at 65.

Job openings soared to a fresh all-time high in July, evidence that the labor market continues to heat up.  However, employers aren’t necessarily filling those positions with higher paychecks.  The Labor Department’s Job Openings and Labor Turnover Survey (JOLTS) last week showed that actual hires fell 4% to 5 million, more than ¾ of a million lower than openings.  July marked the 6th straight month in which that relationship was upside down.  Tara Sinclair, chief economist at job website indeed.com attributes this to the hangover of a weak labor market.  “Employers had many years where they were able to get workers they wanted without having to make the job competitive,” she stated.

Builder sentiment rose to a high not seen since November 2005.  The National Association of Home Builders Housing Market Index gained a point to 62, beating expectations of a flat reading.  The gauge of current sales conditions rose 1 point to 67 and buyer traffic rose 2 points to 47.  Mortgage applications declined -7% in the Mortgage Bankers Association’s composite index last week.  Applications to purchase were down -4% and refinancing applications declined -9%.  Builders broke ground on fewer homes than expected in August.  Housing starts ran at a 1.12 million annual pace in August, down from a 1.16 million pace in July and below forecasts of 1.17 million.  However, August housing starts were +17% higher than year-ago levels. 

The consumer price index declined -0.1% in August, missing forecasts of a flat reading.  For the year, the CPI is +0.2% higher.  Excluding food and energy, the index rose +0.1% for the month and was +1.8% higher versus a year ago.  The number is still short of the +2% goal of the Federal Reserve.

Retail sales were up +0.2% in August, a tick less than expected, but July’s number was increased to +0.7% from +0.6%.  Core retail sales, used in calculating GDP, advanced a strong +0.4% following a +0.6% gain in July.  Core retail sales exclude automobiles, gasoline, building materials and food services.  Redbook reported that same-store sales rose +1.7% versus a year ago last week.  This was an improvement over the +1.3% yearly rise the prior week.

Industrial production declined -0.4% in August, worse than the -0.2% expected.  Manufacturing declined -0.5% and mining activity fell -0.6%.  Weaker overseas economies and a stronger dollar may be taking a toll on industrial exporters.  Capacity utilization, which measures how much spare capacity remains in capital equipment, declined –0.2% to 77.6%.

In Canada, inflation remains flat as the consumer price index was unchanged in August and up +1.3% versus a year ago.  The Bank of Canada’s core reading rose +2.1% for the year, down from +2.4% recorded in July.  The plunge in oil prices continues to weigh heavily on the Canadian economy.

In the Eurozone, industrial production rose +0.6% in July, beating expectations, and June’s reading was also revised upward.  Output is +1.9% higher versus a year ago, also beating expectations.  Subsectors were mixed with energy up +3% but consumer nondurables down -0.6%.  The currency bloc’s trade surplus rose to €31.4 billion ($35.6 billion), up from €21.2 billion a year ago.  Exports rose +7%, and imports rose +1%.  All in all, the data suggests a gradually improving European economy.  Inflation in the Eurozone weakened as the consumer price index for August was revised down to a yearly gain of just +0.1%, the weakest since April.  The core reading, which excludes food, alcohol, tobacco, and energy was revised down to+ 0.9% – just half the ECB’s target level.

In China, industrial output rose +0.53% in August, stronger than July.  Output for the year was up a slightly disappointing +6.1%, vs. expectations of a year to date gain of +6.5%.  Retail sales were up +10.8% year to date in August, better than expected.

Finally, earlier this month Starbucks fans were treated to the annual arrival of Pumpkin Spice Latte.  The Pumpkin Spice Latte is Starbucks most popular specialty beverage of all time and marks the return of autumn for many customers.  Starbucks has significantly revamped the beverage this year because of pressure brought to bear by a food safety and nutrition writer with a wide following on the Internet.  For example, for the first time ever, this year the Pumpkin Spice Latte will contain actual…pumpkin!  Several other changes have been made, but it is still the case that a grande’ Pumpkin Spice Latte will shock your system with more than 500 calories (about the same as a Big Mac), including an astounding 50 grams of sugar!

Here is the graphic published by the internet food writer Vani Hari, aka “The Food Babe”, which galvanized pressure on Starbucks and appears to have forced the changes for this season (the full article that started it all can be found at http://www.foodbabe.com/2014/08/25/starbucks-pumpkin-spice-latte):

Beside the addition of actual pumpkin, the most significant other change announced by Starbucks is the exclusion of the caramel coloring.  The Starbucks press release on the changed ingredients can be found at: http://blogs.starbucks.com/blogs/customer/archive/2015/08/17/pumpkin-spice-latte-2015.aspx

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

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

The average ranking of Defensive SHUT sectors rose slightly to 8.8 from the prior week’s 9, while the average ranking of Offensive DIME sectors fell to 17 from the prior week’s 16.3.  The Defensive SHUT sectors still have a lead in rankings 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 as new highs are reached in the US. 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 9/11/2015

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 24.8, up from the prior week’s 24.4, 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 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 53.18, up from the prior week’s 50.92, and continues in Cyclical Bull territory.  Several of the world’s major markets have entered Bear territory, most notably China and Brazil, while many of the world’s other markets – including some US indexes – are in “correction” territory (10% or more from their highs).

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) has been Positive since August 26, after having been Negative since May 6.  The indicator ended the week at 11, up from the prior week’s 7.  Separately, the quarter-by-quarter indicator – based on domestic and international stock trend status at the start of each quarter – gave a positive indication on the first day of July for the prospects for the third quarter of 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), all major equity markets are in Cyclical 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 positive signal for the 3rd quarter:  US equities were in an uptrend at the start of Q3 2015, sufficient to signal a higher likelihood of an up quarter than a down quarter. 

In the markets:

US stock indexes rose in a holiday-shortened week as market participants await the Federal Reserve’s decision on interest rates in the coming week.  For the week just ended, the Dow Jones Industrial Average gained 330 points to end the week at 16,433, a rise of +2.05%.  The tech-heavy Nasdaq rose almost +3% to end the week at 4,822.  The Nasdaq is now the only major index in the green for the year.  The LargeCap S&P 500 gained +2.07%,  the MidCap S&P 400 tacked on +2.03%, and the SmallCap Russell 2000 added +1.9%.

In international markets, Canada’s TSX ended slightly down by -0.12%, the United Kingdom’s FTSE gained +1.24%, France’s CAC40 added +0.57%, and Germany’s DAX gained +0.85%.  In Asia, China’s Shanghai Stock Exchange composite ended a 3 week downtrend by gaining +1.27%.  Japan’s Nikkei rebounded from last week’s plunge by gaining +2.65%.

In commodities, crude oil resumed its decline by giving up -2.16%, ending the week at $44.78 a barrel.  Gold experienced its 3rd week of declines, down -1.28% to $1107.90 an ounce.  Silver tacked on +$0.03 an ounce to $14.59, and Copper surged +6.06% after being down the prior week.

In US economic news, the Job Openings and Labor Turnover Survey (JOLTS) revealed there were 5.75 million job openings in July, the highest in the history of the Labor Department’s survey and up more than a million versus a year ago.  Seemingly at odds with the JOLTS number, actual hires declined to 5 million from 5.2 million.  This discrepancy illustrates what economists call a skills mismatch.  Employers aren’t finding the workers they want even as lots of Americans remained unemployed.  The “Quits” number, which signals job holders’ confidence in the job market, declined slightly to 2.69 million from 2.73 million.

The Mortgage Bankers Association’s weekly index dropped -6.2% last week as refinancings dropped -10%.  Purchases were down -1%, but up +41% compared with this time last year.  Fannie Mae introduced the Home Purchase Sentiment Index that combines the results from consumer surveys into a new index.  The new sentiment index declined to 80.8 in August due to consumer concerns of expectations of rising interest rates and the direction of the economy.  CoreLogic reported that foreclosures were down -24.4% vs. a year ago in July.

Consumer confidence sank as the University of Michigan’s reading for September fell 6.7 points to 85.7.  That was the largest monthly decline in nearly 3 years.  Most of the drop came from a -8.4% decrease in the expectations component.  The current conditions gauge fell -4.6 points to 100.3.  Producer prices were flat in August, beating consensus of -0.2% and were down -0.8% versus a year ago.  Ex food and energy, prices rose 0.3% in August, beating expectations.  That measure is up 0.9% versus a year earlier, but well below the Fed’s 2% inflation target. 

Import prices were down -1.8% in August, more than the -1.6% expected and remain -11.4% below year ago levels.  Export prices dipped -1.4%, lower than the -0.4% expected, and down -7% for the year.  Prices of imports and exports returned to levels not seen since 2009.  The Fed’s target for inflation is 2%, but as the price of oil continues to test lows that target is going to be hard to reach.

Redbook reported that same-store sales rose +1.3% versus a year ago last week—in line with expectations.  Small business sentiment showed improvement as the National Federation of Independent Business’s optimism index rose almost half a point to 95.9 in August, barely missing expectations of 96.  More owners stated they plan to hire, however plans to expand capital stock remain unchanged.  The sales outlook improved, but overall views of the economy pulled back.

In Canada, housing starts rose +12.2% in August to an annualized rate of 217,000, beating expectations of 194,000.  It was the highest reading since August 2012.  Multi-family units gained almost +20% while single-family homes were up just +1.4%.  The household debt-to-income ratio rose to an all-time high of 164.6% in the second quarter, with mortgages accounting for the biggest portion of household debt.  The Canadian housing market has been robust amid concerns that two rate cuts by the central bank will prompt consumers to borrow even more.

In the United Kingdom, a country sometimes called “a nation of shopkeepers”, those same shopkeepers have been having a tough time maintaining their pricing: the British Retail Consortium reported that retail shop prices fell 1.4% in August, the 28th straight month of declines.

In the Eurozone, the economy grew +0.4% in Q2, up from the initial +0.3% reading.  For the year, growth was revised up to +1.5% from +1.0%; expectations were for a +1.2% gain.  Much of the gain was due to a strong rise in exports, attributed to the weaker euro.  In export powerhouse Germany, exports jumped +2.5% in July, to a +6.2% annual increase and a new record high.  Imports rose +2.3%, increasing the trade balance to 22.8 billion euros from 22.1 billion.  Weakness persists in France, as French industrial production dropped -0.8% in July.  Expectations had been for a flat reading, but most subcomponents declined, including manufacturing, which was down -1%.  Output was also -0.8% lower for the year to date.

In Asia, China’s trade balance rose to $60.24 billion in August from $43.03 billion.  Exports declined -5.5% versus a year ago.  Imports declined more than twice the decline in exports, plunging by -13.8%, and twice the -6.5% decline forecast, widely interpreted as a sign of weak domestic demand.

Finally, if you have thought to yourself recently that there seems to be a rise in the number of days when all stocks are going up or all stocks are going down, with large moves in either direction…you are right.  Between August 20 and September 4 (12 trading sessions), there were 8 days when at least 80% of all stocks went in the same direction, whether up or down.  This is very unusual, having only happened two other times since 1990, according to research group Bespoke.

Some analysts believe that the rise in popularity of “Index” ETFs and Mutual Funds are at least part of the cause, since (to use an oversimplified example) when there is buying in an S&P 500 Index ETF, well, 500 stocks have to be simultaneously bought, and when there is selling in that same S&P 500 Index ETF, 500 stocks have to be simultaneously sold.

One might think that this simultaneous buying or selling of huge swaths of the market in these “one-way days” would increase correlation among those stocks, and that is what appears to be happening over the past decade or so, paralleling the rise in Index ETFs and Mutual Funds, according to this chart by FactSet, using Bloomberg data:

(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 9 from the prior week’s 6.8, while the average ranking of Offensive DIME sectors rose to 16.3 from the prior week’s 17.3.  The Defensive SHUT sectors still have a lead in rankings 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 as new highs are reached in the US. 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 9/4/2015

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 24.4, down from the prior week’s 25.2, 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 50.92, down from the prior week’s 54.77, and continues in Cyclical Bull territory.  Several of the world’s major markets have entered Bear territory, most notably China and Brazil, while many of the world’s other markets – including the US – are in “correction” territory (10% or more from their highs).

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) has been Positive since August 26, after having been Negative since May 6.  The indicator ended the week at 7, up from the prior week’s 3.  Separately, the quarter-by-quarter indicator – based on domestic and international stock trend status at the start of each quarter – gave a positive indication on the first day of July for the prospects for the third quarter of 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), all major equity markets are in Cyclical 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 positive signal for the 3rd quarter:  US equities were in an uptrend at the start of Q3 2015, sufficient to signal a higher likelihood of an up quarter than a down quarter. 

In the markets:

Stocks gave up last week’s gains and reversed course again to end the week in negative territory for both the week and year-to-date.  Volatility remained high with sharp drops on Tuesday and Friday more than offsetting earlier gains.  The Dow lost over 540 points to end the week at 16,102.  The Nasdaq declined over 144 points, closing at 4683.  The SmallCap Russell 2000 showed relative strength, down only -2.3%.  The SmallCaps are thought to have fared better due to their lower level of exposure to the travails in China, compared with LargeCap companies (-3.4% for the week) most of which have overseas operations.  Canada’s TSX did a bit better than the US at -2.8%.

European market results looked quite similar to the US for the week: the United Kingdom’s FTSE dropped -3.28%, Germany’s DAX ended down -2.53%, France’s CAC40 declined -3.25%, and Italy’s FTSE Milan index also lost over 2.3%.  In Asia, China’s Shanghai composite had its 3rd consecutive week of declines, down -2.23%.  Japan’s Nikkei, which had been holding tenaciously to the 20,000 level until the week before last, fell sharply to end the week at 17,792 – a loss of more than -7%!

In commodities, crude oil had its second straight week of gains up +1.02% to close at $45.77 a barrel.  Gold lost $10.30 an ounce, closing the week at $1122.30.  Copper gave up last week’s gain, dropping -1.24%.

In US economic news, the very important NonFarm Payroll report (NFP) was released on Friday, showing that US employers added 173,000 jobs in August, missing expectations of a 223,000 gain.  The jobless rate fell to 5.1%, the lowest level since April 2008.  The latest rate meets the Federal Reserve’s definition of “Full Employment”, even though the labor force participation rate remained unchanged at a historically low 62.6%.  Analysts speculate that the latest jobless numbers may give the Fed the confidence it needs to finally begin raising interest rates.

The Mortgage Bankers Association (MBA) reported that refinancing applications jumped +17% last week.  Mortgage rates remained unchanged, though treasury yields declined slightly.  Applications to purchase a home rose +4%.  The MBA’s composite index rose +11.3% for the week.  CoreLogic reported that home prices rose +1.7% in July, a 6.9% yearly increase.  CoreLogic is forecasting a +4.7% yearly gain thru next July.

The US services sector remains strong as the Institute for Supply Management’s (ISM) nonmanufacturing index stayed at 59 in August.  It was the second strongest month since December 2005, and beat analyst forecasts.  New orders came in at an even stronger 63.4.  Factory growth in the Midwest remained stable according to the regional ISM Chicago/Midwest manufacturing index.  The gauge edged down -0.3 point to 54.4 vs. forecasts for no change, but still in expansion (>50) territory.  Nationally, however, the US Purchasing Managers Index (PMI) for manufacturing hit a two year low, falling 1.6 points to 51.1 in August.  This is the lowest since May 2013. New orders dropped -4.8 points to 51.7, while export orders fell further into contraction.

Oil’s plunge is hitting the Lone Star State particularly hard.  The Dallas Federal Reserve reported regional energy production and manufacturing fell sharply, as did a measure of new orders.  Oil prices have continued the retreat since late June, reaching a fresh 6-year low below $38 a barrel last week before rebounding back into the low $40’s this week.

Canada’s economy contracted for a second straight quarter, putting the country technically in recession (the technical definition is two consecutive quarters of GDP shrinkage).  GDP declined at a -0.5% annualized pace in the second quarter, according to Statistics Canada.  The agency revised the first quarter contraction to -0.8% from 0.6%.  Business investment fell by -7.9% in the second quarter after a -10.9% decline in the first three months of the year.  The decline in business investment and the continued weakness in crude oil prices were cited as the chief causes of the contracting GDP.  Employment in Canada was a mixed picture in August.  Payrolls expanded by +12,000 beating expectations of a decline of -2500, but despite the gain the jobless rate ticked up to 7% from 6.8%.

In the Eurozone, August consumer prices rose just +0.2% vs. a year earlier, while core prices climbed +1%, the EU’s statistics office said.  Both were unchanged from July.  The European Central Bank (ECB) has an inflation target of just under 2%, but has struggled to make headway toward that goal given sluggish Eurozone and global activity while renewed falls in oil prices and strength in the Euro continue to put downward pressure on prices and inflation.  The European Central Bank therefore cut its forecast on inflation to just 0.1% this year, from 0.3%.  It also reduced next year’s forecast to 1.1% in 2016 from 1.5%.  GDP was also revised down to 1.4%.  ECB president Mario Draghi said the ECB’s bond buying program would be expanded if necessary.

Manufacturing in the Eurozone declined slightly from 52.4 to 52.3, according to Markit’s August PMI.  The report noted that employment was rising at the fastest pace in four years.  Although France and Greece remained in contraction, other large Eurozone economies including Spain and Italy had strong readings.  The composite PMI ticked up to 54.3 in the final August reading, up +0.4 point from July.  The service component was 54.4, also a +0.4 increase over July.

Manufacturing in China fell further into contraction according to the private Caixin-Markit PMI, which came in at 47.3.  This was the quickest deterioration in operating conditions since 2009.  It was also the sixth straight month of contraction.  Factory output sank the fastest since November 2011.  The “official” China PMI, which focuses more on large state-owned companies, declined -0.3 point to 49.7, the lowest in three years.

Finally, as mentioned earlier in this report, the US unemployment rate now stands at 5.1% – the lowest since 2008.  Market weakness on Friday is being attributed at least in part to the reality that with the unemployment rate now in the Federal Reserve’s target window of “full employment”, a rate hike could be in the cards as soon as mid-September.  Even though at first blush the August NonFarm Payroll (NFP) report was on the weak side at just 173,000 jobs added, the August jobs report in particular has a longstanding reputation for being frequently revised upward due to problems with seasonal adjustments and widely off-the-mark estimates.  Jim O’Sullivan, Chief U.S. Economist at High Frequency Economics stated that “payrolls were weaker than generally expected, but there has been a clear tendency for the August data to be underreported initially and then revised up later.”  Here is a multi-part graphic from marketwatch.com that nicely summarizes all the major parts of the August report:

(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 6.8 from the prior week’s 5.5, while the average ranking of Offensive DIME sectors rose slightly to 17.3 from the prior week’s 17.8.  The Defensive SHUT sectors still maintain a sizable lead in rankings 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 as new highs are reached in the US.

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 8/28/2015

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 25.2, up slightly from the prior week’s 25.0, 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 54.77, up sharply from the prior week’s 48.69, and continues in Cyclical Bull territory.  The current Cyclical Bull has taken the US and some of Europe to new all-time highs, but many of the world’s markets have yet to top 2007’s levels – particularly in the Emerging Markets area.

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) turned Positive this week when the market sharply rebounded from a deep selloff, and ended the week at 3, down from the prior week’s 5, but up from the mid-week level of 2.  Separately, the quarter-by-quarter indicator – based on domestic and international stock trend status at the start of each quarter – gave a positive indication on the first day of July for the prospects for the third quarter of 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), all major equity markets are in Cyclical 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 positive signal for the 3rd quarter:  US equities were in an uptrend at the start of Q3 2015, sufficient to signal a higher likelihood of an up quarter than a down quarter. 

In the markets:

Major stock indices ended the week with modest gains, but not before enduring the highest level of volatility in many years.  For the week, the Dow Jones Industrial Average closed up +1.1%, but not before traveling almost 1,300 points from peak to trough!  The NASDAQ composite gained +2.6% to close at 4828, clawing its way back to positive territory year to date.  The S&P 500 gained +0.91% and the SmallCap Russell 2000 gained +0.53%.

International markets followed the U.S. market’s lead in recovering from the steep losses that occurred early in the week.  Canada’s TSX gained +2.9%, the United Kingdom’s FTSE was up +0.97%, and Germany’s DAX was up +1.72%.  China, on the other hand, did not recover.  Though China was able to halt an absolute market crash, the Shanghai stock exchange composite index still declined -7.85% for the week.  Japan’s Nikkei index also declined, losing 1.54%.

In commodities, crude oil surged more than +12% on news that Saudi Arabia had invaded Yemen.  Early-week strength in gold faded, and gold ended the week down -2.35% to $1132.60 an ounce.  Silver also declined, dropping 4.83% to $14.58 an ounce.  The industrial metal copper ended the week up 2.18%.

In US economic news, the economy expanded at a +3.7% annual rate in the second quarter, according to the Commerce Department.  That smartly beat expectations for an upward revision to 3.2%.  Nearly all the details were stronger and pointed to a healthy economy.  Business investment led the upward revision with nonresidential investment now seen up +3.2% versus down -0.6%.  Intellectual property spending grew the most since 2007.  Both consumers and businesses spent more than initially forecast.

Home prices picked up as the S&P/Case-Shiller 20-city Home Price Index ticked down -0.1% in June, but rose +5% versus a year ago.  The national average was up +4.5% versus a year ago in June.  The hottest cities remain Denver, Dallas, and San Francisco.  New home sales jumped to a 507,000 annual pace in July, a +5% gain versus June.  Sales are up +26% versus a year ago, and it is the eighth straight month of double-digit yearly gains.

Business economists who are members of the National Association of Business Economists expect the Fed to hike rates before the end of 2015.  A large majority, 77% of survey respondents, expect the Fed to hike rates, up from 71% in March.  66% feel that the Fed should take this step.

In a big upside surprise, the Conference Board’s consumer confidence index jumped more than +10 points to 101.5, blowing away expectations of a 94 reading.  Consumers’ views of the labor market drove the increase.  However, the University of Michigan’s sentiment index fell -1 point to 91.9, missing expectations for a gain.  The current conditions gauge fell -2.1 points, but the overall U of M index remains up a strong +11.4% versus a year ago.

US durable goods orders jumped +2% in July, when analysts had been expecting a -0.4% decline.  Orders remain nearly -20% lower versus last year, but analysts cite a large air show order as skewing last year’s data.  Excluding transportation, July orders were up +0.6%, also beating expectations.  Core capital goods, which gauge business investment, rose a strong +2.2% in July – the second straight monthly gain.  This could indicate that the capital expenditure plunge triggered by the precipitous decline in oil prices may have leveled off.

Former Treasury Secretary Larry Summers said in a Washington Post opinion piece that it would be a serious error for the Fed to hike rates in September.  Doing so would jeopardize price stability, financial stability, and even full employment, he wrote.  His opinion is seemingly shared by New York Federal Reserve President William Dudley, a top Federal Reserve policymaker, who said that he’s less interested in a Fed “liftoff” next month, citing “international and financial market developments”.  “From my perspective, at this moment, the decision to begin the normalization process at the September FOMC meeting seems less compelling to me that was a few weeks ago,” he said.  However, other Fed officials are more hawkish.  Kansas City Fed President Esther George said in a CNBC interview that recent market action “complicates the picture, but I think it’s too soon to say that fundamentally changes that picture.  So in my own view the normalization process needs to begin and the economy is performing in a way that I think it’s prepared to take that.” 

In the Eurozone, loans to business rose +0.9% for the year in July.  Household borrowing was up a +1.9% yearly gain versus +1.7% in June.  The data suggest that the European Central Bank’s efforts to boost the economy may be finally resulting in more demand.  Consumer confidence also improved in the Eurozone as the EU commission sentiment tracker rose 2 ticks to 104.2.  Consumer, retail, and construction sectors all rose.  The German Economy Ministry soothed concerns that a slowdown in China will have significant negative impact in Germany, pointing out that German exports to China account for only 6.6% of total exports.

On Tuesday, China’s central bank cut interest rates and reserve requirements after several days of pronounced weakness in its stock market, which declined more than -7% on Tuesday and more than -8% on Monday.  The People’s Bank of China cut interest rates by 25 basis points to 4.6%.  It also reduced bank reserve requirements by a half percent, a step which should flood roughly $100 billion into the financial system.  The government has stated its intentions of rebalancing the economy towards the service sector and consumption, and away from export-oriented manufacturing.

Finally, the volatility of this past week has many nervous investors searching for good news.  Institutional research firm Ned Davis Research provided that dose of good news this week when it wrote about what it calls “the best indicator you’ve never heard of” – and it is bullish.  This indicator is constructed from the stock market’s Price to Earnings (PE) ratio plus the unemployment rate plus the inflation rate.  The latter two are sometimes combined into a number called the “Misery Index”.  As the chart below shows, the stock market’s historical performance has been far better when this indicator is lower than when it is higher – and we are now in the second-lowest quartile, thanks mostly to a low unemployment rate and very low inflation, nicely offsetting a fairly high PE ratio.  By this metric, anyway, the long-anticipated market correction that has finally occurred may be unlikely to become the beginning of a major bear market.  See the chart below, from marketwatch.com.

(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 5.5 from the prior week’s 4.5, while the average ranking of Offensive DIME sectors rose slightly to 17.8 from the prior week’s 18.0.  The Defensive SHUT sectors maintained a large lead in rankings 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 as new highs are reached in the US.

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 8/21/2015

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 25.0, 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 48.69, down substantially from the prior week’s 51.47, and continues in Cyclical Bull territory.  The current Cyclical Bull has taken the US and some of Europe to new all-time highs, but many of the world’s markets have yet to top 2007’s levels – particularly in the Emerging Markets area.

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) is Negative and ended the week at 5, down from the prior week’s 8.  Separately, the quarter-by-quarter indicator – based on domestic and international stock trend status at the start of each quarter – gave a positive indication on the first day of July for the prospects for the third quarter of 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), all major equity markets are in Cyclical 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 positive signal for the 3rd quarter:  US equities were in an uptrend at the start of Q3 2015, sufficient to signal a higher likelihood of an up quarter than a down quarter. 

In the markets:

Major indexes around the world experienced their largest weekly declines since 2011 as concerns grew that China’s economic slowdown would weigh heavily on global growth and commodity prices.  A plunge in some emerging market currencies also raised fears of a global round of competitive devaluations.  Nations devaluing their currencies against each other could cut deeper into the profits and competitiveness of U.S. multinational companies.  All of the major benchmarks are now negative year to date.  The Dow Jones Industrial Average and SmallCap Russell 2000 have both declined over 10% from their peaks, putting them into what is commonly considered “correction” territory.

For the week, the Dow Jones Industrial Average lost a whopping 1017 points to close at 16459.  The tech heavy Nasdaq lost the psychologically-important 5000 level, losing 342 points to 4706.  The S&P 500 LargeCap index declined -5.77% for the week and the small cap Russell 2000 gave up -4.61%.  It is noteworthy that the SmallCap Russell 2000 lost less than the LargeCap S&P 500, since the higher-volatility SmallCaps normally lead to the downside during market declines, perhaps due to the perception that SmallCaps have less dependency on China and other international trouble spots than their larger brethren.  Canada’s TSX shed -5.63%, down for the third week in a row.

A broad sweep of international markets also showed weakness.  Developed International gave up -6.38%, Emerging Markets plunged over -7.8%.  Northern European markets were not immune: the United Kingdom’s FTSE dropped -5.54%; Germany’s DAX Composite plunged -7.83%; France’s CAC 40 likewise dropped -6.57%.  In Asia, China’s Shanghai Composite index got the booby prize for the worst performing major market, collapsing 11.54%, while Japan’s Nikkei dropped -5.28%. 

In commodities, an ounce of Gold jumped +4.2% to $1159.90 an ounce.  Silver’s rise was more tepid, a gain of only $0.10 to $15.32 an ounce.  Crude oil had its tenth straight week of declines, giving up over -4.48% for the week.  A barrel of crude oil is hovering just above $40 at $40.29 a barrel, and now is back to levels last seen in the depths of the Great Recession in 2009.

In US economic news, the housing market was the source of the majority of the good news reported during the week.  Home builder sentiment continued to improve as the National Association of Home Builders index rose to 61 from 60—the highest since 2005.  Future sales outlook weakened slightly but remained strong at 70, while the “current conditions” index remained unchanged at 66.  Housing starts neared an 8-year high, now running at a pace of 1.206 million units/yr in July, nicely beating expectations.  This pace has not been seen since just before the Great Recession began.  The National Association of Realtors reported that new and existing home sales jumped +2% in July to a pace of 5.59 million, beating expectations.  It was the highest since February 2007, and was +10.3% higher than a year ago.  The median price was +5.6% higher versus a year ago in July.

The Consumer Price Index (CPI) rose just +0.1% in July, missing expectations of a +0.2% gain.  For the year, the index stands just 0.2% higher.  Core inflation, which strips out food and energy, also rose just 0.1% during the month, but is up 1.8% versus a year ago, much nearer to the Federal Reserve’s 2% target.

Manufacturing in the United States slowed in August as Markit’s flash Purchasing Managers Index (PMI) showed the slowest improvement in business conditions in nearly 2 years, falling nearly a point to 52.9.  Output growth drove the decline, but production volumes were also weak.  According to the survey a stronger dollar was weighing on exports, and China’s weaker yuan is expected to further worsen the situation.

In minutes released of the July 28-29 Federal Reserve’s Open Market Committee session, Federal Reserve officials said last that while conditions for raising interest rates were approaching, they saw more room for labor market improvement and need more confidence that inflation is moving toward their goal.  Most meeting participants “judged that the conditions for policy firming had not yet been achieved, but they noted that conditions were approaching that point.”  However, St. Louis Fed President James Bullard told MNI News that he will argue for a September rate hike at the central bank’s upcoming meeting.  Bullard said he isn’t concerned that inflation and wages remained below Fed targets, but does fear financial bubbles as the Fed keeps interest rates at record lows.

In Canada, core inflation in the central bank’s measure was at a rate of 2.4% in July, matching expectations.  The Bank of Canada targets inflation at 1% to 3%.  Separately, retail sales rose +0.6% during June and were up +1.4% versus a year ago. 

Good trade numbers headlined Eurozone economic news during the week.  Exports rose +12% in June versus this time last year, thanks to a weaker Euro.  Imports were also up by +7%.  The trade balance increased to €21.9 billion from €21.3 billion.  Trade with member countries was up +10% versus year ago, indicating stronger economic activity.  Markit’s composite PMI for the Eurozone rose +0.2 point to 54.1, one of the strongest readings in the last two years.  Overall, new business ran at the fastest pace since May.  Output accelerated in Germany and confidence increased in France. 

In China, fears of a “hard landing” may become a reality.  The Markit manufacturing PMI index dropped to a 77-month low of 47.1 in August.  The manufacturing output index declined to 46.6, a 45-month low.  Nearly all categories decreased at faster rates than prior months.

Brazil’s economic news has gone from bad to worse.  Economic activity declined more than expected in June.  The central bank’s economic activity seasonally adjusted index fell over half a percent.  Analysts expect the economy to contract -2% in 2015.  Unlike counterparts elsewhere round the world, the Brazilian central bank is not stimulating the economy with cheaper money – instead, it is keeping the Brazilian benchmark interest rate at 14.25% to combat inflation.  This is every central banker’s nightmare scenario – stagflation.

Finally, we highlight the flight of investor money from U.S. stock funds, which some say is actually more of a “stampede”.  According to a recent CNBC article, this year $78.7 billion has left domestic equity-focused funds according to fund researcher Morningstar.  Domestic equity funds gave up $20.4 billion in July alone, and over $158 billion in the past 12 months – a higher outflow than in the Great Recession of 2008-2009.  Analysts are unable to point out the exact cause as, up until this past week, the market hasn’t performed all that poorly. 

Analysts speculate that investors believe the United States is nearing the end of its six and half year bull market, and that globally, internationals are cheaper on a fundamental level.  It is believed that investors think that Japan and Europe are at different points of their economic cycles and that they are still actively stimulating their economies.  International equity funds have indeed garnered much of that outflow, depicted in the graph below:

Source: CNBC “Money Flees U.S. Stocks at highest level since 1993”

(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 again to 4.5 from the prior week’s 5.5, while the average ranking of Offensive DIME sectors rose slightly to 18.0 from the prior week’s 18.5.  The Defensive SHUT sectors again expanded their lead in rankings 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 as new highs are reached in the US.

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,