FBIAS™ for the week ending 9/23/2016

FBIAS™ for the week ending 9/23/2016

The very big picture:

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

Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best.   The CAPE is at 26.86, up from the prior week’s 26.56, and only a little lower than the level reached at the pre-crash high in October, 2007.  Since 1881, the average annual return for all ten year periods that began with a CAPE around this level have been just 3%/yr (see graph below).

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

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate.  The U.S. Bull-Bear Indicator (see graph below) is in Cyclical Bull territory at 62.85, up from the prior week’s 62.05.

In the intermediate picture:

The Intermediate (weeks to months) Indicator (see graph below) turned positive on June 29th.  The indicator ended the week at 31, unchanged from the prior week.  Separately, the Quarterly Trend 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 2016.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2 above), whether we are in a new Secular Bull or still in the Secular Bear, the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns.  The Bull-Bear Indicator (months to years) is positive (Fig. 3 above), indicating a potential uptrend in the longer timeframe.  The Quarterly Trend Indicator (months to quarters) is positive for Q3, and the Intermediate (weeks to months) timeframe (Fig. 4 above) is also positive.  Therefore, with all three indicators positive, the U.S. equity markets are rated as Very Positive.

In the markets:

U.S. stocks slumped Friday, putting a damper on an otherwise strong week for the market.  On Wednesday, the Federal Reserve elected to hold interest rates steady which seemed to be the catalyst for the week’s gains.  The move (or lack thereof) was widely expected, but analysts noted that Fed Chair Janet Yellen’s tone appeared to be less “hawkish”.  Markets were a sea of green for the week, with all major indexes recording gains.  The Dow Jones Industrial Average added +137 points to close at 18,261, up +0.76%.  The tech-heavy NASDAQ Composite managed a gain of +61 points to 5,305, a gain of +1.17%.  Smaller indexes showed relative strength, as they have for much of the year to date, with the S&P 400 MidCap index rising +1.96% and the Russell 2000 SmallCap index gaining +2.44% while the LargeCap S&P 500 index added a more modest +1.19%.  The Russell 2000 and NASDAQ Comp both established new highs for the year on Thursday.  Both Transports and Utilities had a strong week with the Dow Jones Transports index rising +2.14% and Utilities up +3.34% as defensive sectors enjoyed a good week. 

In commodities, precious metals had a strong week with Gold up $31.50 to $1341.70, a gain of +2.4% per ounce, and Silver surging +5% to $19.81 an ounce.  Oil was also bid up, with a barrel of West Texas Intermediate crude oil settling at $44.48, up +1.97%.  The industrial metal copper also gained, adding +1.9%.

In international markets, it was a sea of green as almost every major economy recorded gains.  To the north, Canada’s TSX was up +1.7%.  In Europe, the United Kingdom’s FTSE rose +2.97%.  On Europe’s mainland, the major economies of Germany and France enjoyed significant gains, up +3.4% and +3.6% respectively.  Italy’s Milan FTSE was also up +1.6%.  To the east, China’s Shanghai Stock Exchange added +1%, along with Hong Kong’s Hang Seng which rose +1.5% and Japan’s Nikkei which was up +1.42%.  Broadly speaking, both developed markets and emerging markets enjoyed strong gains with the widely-followed Developed Market ETF “EFA” ending the week up +3.08% and the Emerging Market ETF “EEM” gaining +3.07%.

In U.S. economic news, initial jobless claims fell -8,000 to 252,000 vs. an expected 260,000, the lowest level since July and signaling a continued strong labor market.  Initial claims have remained below 300,000 for 81 weeks, the longest streak since 1970.  The smoothed 4-week average of new claims also fell 2,250 to 258,500.  Continuing claims, the number of people already receiving benefits, fell 36,000 to 2.1 million the previous week. 

In housing – it’s hot out there!  The National Association of Home Builders (NAHB) reported that home builder confidence surged to its highest level in 10 years.  The NAHB’s index climbed +6 points to 65, the highest level since the height of the housing boom.  Economists had forecast a reading of 60.  The current sales conditions gauge rose +6 points to 71 and the future sales index gained +5 points also hitting 71.  Buyer traffic added +4 points to 48.  In its release, the NAHB noted that builder sentiment is being supported by the presence of “more serious buyers” in the market.  The Commerce Department reported that multi-family construction starts declined sharply by -7.2% but that permits for single-family starts were up +3.7%.  Starts and permits rose in every region of the country except the South.

Constrained by supply, sales of previously-owned homes fell for a second straight month as the inventory of homes for sale continued to shrink (now down to 4.6 months of inventory).  Existing-home sales fell -0.9% to a seasonally adjusted annual rate of 5.33 million according to the National Association of Realtors.  The figure is +0.8% higher than a year ago.  Economists had forecasted a 5.48 million pace.  The Northeast was the only region to see gains.  The median sale price for a previously-owned home is now $240,000, +5.1% higher than in August 2015.  First time homebuyers made up 31% of the pre-owned market in August.

On Wednesday, the Federal Reserve kept interest rates unchanged, but Chairwoman Janet Yellen said one increase would be “appropriate” this year barring any major new risks to the economy.  Even though senior Fed officials are “generally pleased with how the economy is doing”, the central bank wants to see more progress in the labor market.  At the press conference following the meeting, Yellen said “For the time being we are going to watch incoming evidence.”  Yellen disputed the claim by Republican presidential candidate Donald Trump that the Fed is keeping rates low for political reasons.  She emphatically stated that “Partisan politics plays no role in our decisions.”

The Chicago Fed National Activity index fell into negative territory at -0.55 last month, from a slightly positive reading in July.  The Chicago Fed index is a weighted average of 85 different economic indicators.  Only 19 of the 85 individual indicators made positive contributions in August.  The index’s 3-month average ticked up to -0.07 from -0.09 in July.

The Conference Board’s Leading Economic Indicators (LEI) index fell -0.2% last month due to weakness in the manufacturing sector.  The index was hurt by a decline in the average workweek of production workers as well as a decline in the new-orders component of the Institute for Supply Management’s manufacturing index.  Ataman Ozyildrim, director of business cycles and growth research at the Conference Board put a positive spin on the report, stating “while the U.S. LEI declined in August, its trend still points to moderate economic growth in the months ahead.”

Also in manufacturing, Markit’s flash U.S. manufacturing Purchasing Managers Index (PMI) was the weakest in 3 months due to stagnation in new orders and a stronger U.S. dollar.  The index fell -0.6 point to 51.4, the lowest level since June.  Readings above 50 indicate expansion.  Tim Moore, senior economist at Markit stated “softer new-order gains are the main concern in the latest PMI survey, and this could act as a drag on production growth into the final quarter.” 

In Canada, economists at TD Bank say the Canadian economy is set for a “barn-burner” third quarter, but they also caution that the trend won’t last for long.  TD reported that manufacturing has picked up, oilsands output has rebounded, and exports grew in July following the -1.6% contraction in the second quarter.  TD estimated that growth for the July-September period is set for a +3% increase.  However, TD warned that “Canadians shouldn’t be misled into thinking that this momentum will hold.  Once one-off factors roll off, growth will drift back to a more modest +1.7% to +1.8% pace through 2017 and 2018.”

In the United Kingdom, the Bank of England said that the U.K. economy faces a challenging period after the Brexit vote.  Policymakers stated that the vote for Brexit has created a “challenging period of uncertainty and adjustment.”  In a quarterly update on the health of the financial system, the bank’s policymakers also said the United Kingdom’s withdrawal from the European Union would not be used as a way to reduce regulation on the banking sector.  In its annual assessment of the help-to-buy scheme, a government program aimed to help first-time home buyers, it reported its closure would not lead to mortgage lending drying up or an increase in the size of deposits required to gain a home loan.

On Europe’s mainland, preliminary data on France’s economy contracted slightly in the second quarter.  France’s statistics agency Insee said second-quarter gross domestic product in the Eurozone’s second-largest economy fell by -0.1% quarter-on-quarter, following a +0.7% rise the first quarter.  Enterprise investment fell by -0.4% following a +2.1% rise the first quarter.  French Finance Minister Michel Sapin said that the budget would bring the deficit down to 2.7% of economic output in 2017 from a forecast of 3.3% earlier this year.

Germany’s Finance Ministry said the German economy will lose steam in the second half of 2016 as weaker foreign demand causes industrial output to slow.  In its monthly report, the Finance Ministry stated “German economic growth was robust in the first half of the year, but the latest economic data indicate a slowdown in economic momentum in the second half of the year.”  Growth in industrial orders came to a halt in July and factory output and exports fell unexpectedly.  The ministry blamed weak foreign demand for the low industrial activity and expected factory output would be weak the rest of the year.

China invested more money abroad last year than foreign firms invested in China for the first time ever.  Overseas direct investment surged more than +18% to an all-time high of over $145 billion last year, exceeding the $135 billion of foreign direct investment according to the government’s Statistical Bulletin report.  According to the report, the milestone was a result of the “enhancement of China’s comprehensive national power” by encouraging Chinese firms to “go abroad” in search of growth.  Commerce Ministry representative Zhang Xiangchen told reporters “we feel companies currently are keen to go abroad and actively integrate into global innovation, manufacturing, and market networks.”

Japanese authorities stand ready to act against excessive rises in the yen, according to a top government spokesman.  The warning came amidst recent yen gains that could hurt the country’s export-reliant economy.  The dollar fell to a nearly 4-week low of 100.10 yen on Thursday after the U.S. Federal Reserve trimmed its long-term interest rate expectations.  Chief Cabinet Secretary Yoshihide Suga told a news conference, “We’re concerned about recent extremely nervous moves in the currency market.  The government hopes to keep watching currency market moves ever more carefully and if such moves persist, will be ready to take necessary action.”

Finally, Jim Paulson, chief investment strategist at Wells Capital Management, shared a simple recipe for “substantial stock market gains” during a recent interview on CNBC.  The key condition, he says, is for the S&P 500 earnings growth to be greater than the 10-year treasury yield.  Using data back to 1950, the strategist found that when this is the case, the S&P 500 has gained an average of +11.6% for the subsequent year.  When it’s been below, the S&P has risen just +4.7%.  A further benefit is during periods when earnings are above the treasury yield, there was a lower volatility of returns. 

So which condition are we in now?  Unfortunately, with earnings growth below the current 10-year yield, the current signal is negative for stocks as the chart below illustrates.

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

The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market.  The average ranking of Defensive SHUT sectors rose sharply to 19.3 from 22.3, while the average ranking of Offensive DIME sectors fell even more sharply to 22.5 from the prior week’s 18.3.  The Defensive SHUT sectors now rank higher than the Offensive DIME sectors for the first time in seven weeks, despite the positive week.  Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

If you have any questions about the FBIAS™ Fact-Based Investment Allocation Strategy

portfolios, feel free to give your Anthony Capital, LLC advisor a call at 303-734-7178 or by scheduling a private virtual meeting/conference call.  We work with clients from all over the country and would be happy to help.

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

Sincerely,

Dave Anthony, CFP®, RMA®

FBIAS™ for the week ending 9/16/2016

FBIAS™ for the week ending 9/16/2016

The very big picture:

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

Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best.   The CAPE is at 26.56, up modestly from the prior week’s 26.42, and only a little lower than the level reached at the pre-crash high in October, 2007.  Since 1881, the average annual return for all ten year periods that began with a CAPE around this level have been just 3%/yr (see graph below).

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

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate.  The U.S. Bull-Bear Indicator (see graph below) is in Cyclical Bull territory at 62.05, down from the prior week’s 63.88.

In the intermediate picture:

The Intermediate (weeks to months) Indicator (see graph below) turned positive on June 29th.  The indicator ended the week at 31, down from the prior week’s 33.  Separately, the Quarterly Trend 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 2016.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2 above), whether we are in a new Secular Bull or still in the Secular Bear, the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns.  The Bull-Bear Indicator (months to years) is positive (Fig. 3 above), indicating a potential uptrend in the longer timeframe.  The Quarterly Trend Indicator (months to quarters) is positive for Q3, and the Intermediate (weeks to months) timeframe (Fig. 4 above) is also positive.  Therefore, with all three indicators positive, the U.S. equity markets are rated as Very Positive.

In the markets:

Stocks ended the week modestly higher despite elevated volatility.  The Dow Jones Industrial Average ended the week up +38 points to close at 18,123.  The tech-heavy NASDAQ surged +2.3%, up +118 points to 5,244 (mainly on the back of a big winning week for Apple, which is the most-heavily weighted stock in the NASDAQ index).  Most other major indexes were up with LargeCaps showing relative strength over their smaller peers.  The S&P 500 LargeCap index rose +0.5%, while the S&P 400 MidCap index fell -0.48%, and the SmallCap Russell 2000 ended the week up +0.46%.

In international markets, Canada’s TSX was off -0.6%, while in Europe major markets were red across the board.  The United Kingdom’s FTSE declined -0.98%.  On Europe’s mainland France’s CAC 40 dropped sharply, down 3.5%, Germany’s DAX fell -2.8%, and Italy’s Milan FTSE plunged -5.6% as worries over Italy’s financial sector continued.  Markets in Asia were also red: Hong Kong’s Hang Seng index fell -3.2%, Japan’s Nikkei dropped -2.6%, and China’s Shanghai Composite was off -2.8%.  In broader terms, developed markets as tracked by the ETF ‘EFA’ were down -1.78%, while emerging markets as tracked by ‘EEM’ were down -0.54%.

In commodities, strength in the U.S. dollar weighed on precious metals and energy.  Gold fell $24.30 an ounce to $1310.20, down -1.8%.  Silver, likewise, was off down -2.6% to $18.86 an ounce.  Oil plunged -4.9% to $43.62 a barrel for West Texas Intermediate crude oil after statements from the International Energy Agency and OPEC indicated that elevated inventories are likely to keep the price of oil near current levels until 2018.  The industrial metal copper had a strong week, up +3.2%.

In U.S. economic news, the number of people who applied for unemployment benefits last week rose slightly to 260,000.  The number remains below the key threshold of 300,000, and is still near the lowest level in decades.  Economists had expected a rise to 265,000.  As the labor market continues to tighten, companies are increasingly complaining that they cannot find enough skilled workers.  The smoothed four week average of new jobless claims rose +500 to 260,750, according to the Labor Department.  Continuing jobless claims, those already receiving unemployment benefits rose by 1,000 to 2.1 million in the first week of September.  All figures are seasonally adjusted.

A measure of sentiment of small business owners declined in August as owners became more cautious leading up to the election.  The National Federation of Independent Business (NFIB) small business optimism index fell 0.2 points to 94.4.  The most dramatic change was in the outlook for business conditions in the next six months, which declined -7 points.  In addition, 38% of business owners in the NFIB survey cited the political climate as a reason not to expand – an all-time high for the survey.

Consumer sentiment remained flat at 89.5, according to the University of Michigan’s consumer sentiment index.  Economists had forecast a slight improvement to 90.5.  Consumer’s assessment of the present weakened slightly while future expectations rose.  Richard Curtin, the survey’s chief economist stated “Small and offsetting changes have taken place in the third quarter 2016 surveys: modest gains in the outlook for the national economy have been offset by small declines in income prospects as well as buying plans.”  Curtin stated the reason expectations improved was to be found in the decline in stated inflation expectations for the future.

U.S. retail sales fell in August for the first time in five months as most stores reported a drop in traffic.  The decline of -0.3% missed estimates of a -0.1% decline.  Lately the report has been mixed as online retailers have had solid performance, while more traditional sellers such as department stores have fared poorly.  However, August’s report showed that sales for Internet sellers and mail order companies fell for the first time since the beginning of 2015.  Only restaurants and apparel stores showed much strength, up +0.9% and +0.7%, respectively.  Despite the relatively weak report, economists continue to predict that improved finances of American households will help increase spending in the last quarter of 2016.

Higher rent and surging medical costs are putting a dent in the wallets of Americans, according to the latest Consumer Price Index (CPI) data.  The CPI rose +0.2% last month due to the rising costs of housing and medical care.  Medical care costs rose +1%, the fastest rate since 1984, while prescription drugs soared +1.3% according to the Labor Department.  Excluding the volatile food and energy categories, the so-called core consumer prices rose +0.3%.  The rising costs of housing and healthcare has been at least somewhat offset by lower prices for food and energy.

Two closely watched U.S. regional manufacturing gauges both improved in September.  The Empire State manufacturing index, which measures conditions in the New York area, remained in contraction but improved to 2 from -4.2.  Factories in New York reported fewer new orders, lower shipments and reduced staffing levels, consistent with a contraction reading.  In the city of brotherly love, the Philadelphia Fed Business Index jumped to 12.8, up 10.8 points from a month earlier.  New orders improved, rising from -7.2 to +1.4 and the percentage of firms reporting increases in new orders edged up to 30%, up +3% from last month.

But the Federal Reserve reported that industrial output weakened in August, declining -0.4%.  The decline was worse than the -0.2% drop expected.  On an annual basis, industrial production fell -1.1% in the 12 months through August.  Over the year, manufacturing output was down -0.4% and mining output plunged -9.3%.  The mining sector includes oil and gas extraction, which has been hurt by the low price of oil. 

The federal government ran a budget deficit of $107 billion last month according to the Treasury Department $43 billion more than the same time last year.  The government spent $338 billion last month, up 23% from August 2015.  Increase spending for veterans’ programs and Medicare contributed to the rise.  Total receipts for August were up 10% to $231 billion and up 1% for the fiscal year to date.  Steve Blitz, chief economist at M Science LLC in New York notes, “This deficit has effectively been on a widening trend since the beginning of this year.  We know that the current recovery has failed to create the same growth in nominal incomes as the prior ones, and it is becoming evident in the inability of the primary deficit to get to zero even during this expansion.”

In Canada, the Royal Bank of Canada said the economy will snap back as rising energy prices, low interest rates, and federal stimulus will help economic growth.  The bank said it is looking for real annualized growth in GDP of +3.7% in the 3rd quarter as rebuilding takes place in Alberta following the devastating wildfire.  The bank is anticipating a +1.9% rise in the 4th quarter.  Hurt by the fire and weak exports, the Canadian economy shrank 1.6% on an annualized basis in the second quarter—the largest quarterly decline since 2009.

In the United Kingdom, the Bank of England held interest rates steady in the wake of recent upbeat economic activity.  The move, or lack thereof, was widely expected.  The Bank’s Monetary Policy Committee lowered the UK base rate to a record low 0.25% in August to help cushion the effects of Brexit on the economy.  This month, the bank voted unanimously to leave interest rates on hold and also voted to continue with its monthly bond buying purchases of 435 billion pounds of UK government bonds and 10 billion pounds of corporate bonds. 

German Vice Chancellor and Economic Affairs Minister Sigmar Gabriel will visit Russia next week to hold talks with Russian officials about the state of bilateral trade relations.  The Ministry for Economic Affairs and Energy stated Gabriel was making his visit at a time when trade between Russia and Germany was declining because of weakness in the Russian economy and the low buying power of the ruble.  Trade between the two countries fell 13.7% in the first half of the year compared to a year earlier and German exports to Russia were also down. 

China’s economy strengthened last month following government infrastructure spending and property sales.  A slew of data from factory output to retail sales showed activity rebounding in August following a difficult summer.  China’s National Bureau of Statistics reported that industrial output rose +6.3% last month from a year earlier, and up +0.3% from July – both beating expectations.  Investment in buildings and other fixed assets outside rural households climbed a better-than-expected +8.1% from the previous year in the first 8 months of 2016.

The Bank of Japan is preparing to expand its monetary stimulus even further as the economy remains mired in lackluster economic growth.  Of concern is that the yen is considered a ‘safe haven’ currency that attracts foreign capital, which in turn drives up the price of Japanese exports.  The central bank has repeatedly tried the help Japan’s international trade-reliant economy with “liquidity injections”; however, improvements in the economy perversely drive up the prices of Japanese goods overseas.  But if the BOJ attempts to put downward pressure on the yen by lowering interest rates, it lowers borrowing costs making the economy more attractive to foreign investors, raising the yen and the cycle continues.  This persistent catch-22 has remained a thorn in the side of BOJ officials attempting to spur the Japanese economy to steady growth.  Despite nearly $800 billion of bonds being purchased annually, plus billions of dollars’ worth of exchange trade funds, economic growth remains stagnant while the yen has been on a tear—the opposite of the desired effect.  Japan’s stock market is down 12.7% so far this year.

Finally, there is evidence that 6 years into the economic recovery from the financial crisis, ordinary Americans are finally seeing an improvement in their household incomes. 

Data from the Census Department show that middle-class household incomes are growing at the fastest rate since the Great Recession.  Even better, the strongest gains were noted among the lower-income groups, as can be seen on the chart below which illustrates the greatest percentage increase in real household income growth came in the lowest two income percentile groups. 

Larry Mishel, President of the Economic Policy Institute, stated the data was “superb in almost every dimension.”  Income data had been “submerged” for many years he noted.  “This one year almost single-handedly got us out of the hole.  That’s worth celebrating.”

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

The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market.  The average ranking of Defensive SHUT sectors rose to 22.3 from 23.3, while the average ranking of Offensive DIME sectors fell to 18.3 from the prior week’s 15.8.  The Offensive DIME sectors remain higher in rank than the Defensive SHUT sectors, but by a much-reduced margin.  Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

If you have any questions about the FBIAS™ Fact-Based Investment Allocation Strategy

portfolios, feel free to give your Anthony Capital, LLC advisor a call at 303-734-7178 or by scheduling a private virtual meeting/conference call.  We work with clients from all over the country and would be happy to help.

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

Sincerely,

Dave Anthony, CFP®, RMA®

FBIAS™ for the week ending 9/9/2016

FBIAS™ for the week ending 9/9/2016

The very big picture:

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

Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best.   The CAPE is at 26.42, down from the prior week’s 27.07, and only a little lower than the level reached at the pre-crash high in October, 2007.  Since 1881, the average annual return for all ten year periods that began with a CAPE around this level have been just 3%/yr (see graph below).

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

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate.  The U.S. Bull-Bear Indicator (see graph below) is in Cyclical Bull territory at 63.88, down from the prior week’s 67.21.

In the intermediate picture:

The Intermediate (weeks to months) Indicator (see graph below) turned positive on June 29th.  The indicator ended the week at 33, down from the prior week’s 34.  Separately, the Quarterly Trend 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 2016.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2 above), whether we are in a new Secular Bull or still in the Secular Bear, the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns.  The Bull-Bear Indicator (months to years) is positive (Fig. 3 above), indicating a potential uptrend in the longer timeframe.  The Quarterly Trend Indicator (months to quarters) is positive for Q3, and the Intermediate (weeks to months) timeframe (Fig. 4 above) is also positive.  Therefore, with all three indicators positive, the U.S. equity markets are rated as Very Positive.

In the markets:

Stocks suffered their largest weekly decline since the start of a year, due almost entirely to a sharp sell-off on Friday.  Friday’s plunge marked the end of an extended period of light trading activity and relatively stable stock prices.  For the week, the Dow Jones Industrial Average fell -406 points to 18,085 down -2.2%.  The NASDAQ Composite declined more than -123 points to 5,125, down -2.36%.  LargeCaps did better than SmallCaps and MidCaps for the first time in a while: the S&P 500 LargeCap index ended down -2.39%, while the S&P 400 MidCap index lost 3.19%, and the SmallCap Russell 2000 lost over -2.61%. 

Most international markets were also lower, but not to the extent of the U.S.  Canada’s TSX fell -1.73%, the United Kingdom’s FTSE declined -1.71%, Germany’s DAX lost -1%, France’s CAC 40 ended down -1.1%, and Italy’s Milan FTSE remained nearly flat, down just -0.16%.  But major markets in Asia bucked the trend by ending the week on a positive note.  China’s Shanghai Composite was up for the week, rising +0.37%, Japan’s Nikkei rose +0.37%, and Hong Kong’s Hang Seng index surged a very strong +3.58%.  As a group, international developed markets fell 1.51% (EFA), while as a group international emerging markets fell -1.87% (EEM).

Commodities demonstrated their uncorrelated-ness with equities.  Gold added +$7.80 to $1,334.50 an ounce, up +0.59% and Silver ended the week flat at $19.37 an ounce.  Oil rebounded from the previous 2 weeks decline, rising +3.24% to $45.88 a barrel.

In U.S. economic news, the number of Americans who applied for new unemployment benefits fell by 4000 last week to 259,000, remaining near the lowest level since the early 1970’s.  Economists had forecast a reading of 265,000.  The less-volatile four week moving average of claims fell 1,750 to 261,250.  New claims have remained below the key 300,000 threshold for 79 straight weeks, the longest stretch since 1970.  Continuing jobless claims were also positive, dropping 7,000 to 2.14 million in last week of August.  These claims reflect people already receiving unemployment benefits.  All figures are seasonally adjusted.

Unfilled job openings reached an all-time high of 5.9 million in July, according to the Labor Department’s Job Openings and Labor Turnover Survey (JOLTS).  In the report, hires increased to 5.23 million from 5.17 million in June.  The number of people quitting jobs voluntarily remained flat at 2.98 million, but that number remains up substantially from recessionary levels, interpreted to mean that departing workers are confident about finding another job.  The JOLTS report follows the monthly nonfarm payrolls data, but provides greater detail in labor market conditions, particularly how fluid or stagnant it is.

The Institute for Supply Management’s (ISM) services gauge missed expectations, dropping abruptly to a six year low in the latest string of unexpectedly weak economic data.  The ISM services index dropped to 51.4 last month from 55.5 as new orders plunged.  Consensus expectations had been for a reading of 55.  While readings over 50 still indicate expansion, companies in the US that offer services such as healthcare, transportation services, and financial services grew at their slowest pace since 2010.  The report is of particular concern because services make up roughly 80% of the U.S. economy.  ISM’s manufacturing survey turned negative last month.  Jennifer Lee, a senior economist at BMO Capital Markets stated “much like its manufacturing cousin, the nonmanufacturing services ISM could pour cold water on expectations for a Fed rate hike later this month and also called into question the strength of the economy heading into the fall.”  In the details of the report, the ISM manufacturer new orders index plunged almost 9% to the lowest level since the end of 2013.  The production index had a similar large decline, and the employment gauge remained barely in expansion at 50.7%. 

The Federal Reserve’s Labor Market Conditions Index (LMCI) slipped back into negative territory last month, the seventh negative reading in the last eight months, falling to -0.7 from 1.3 in July.  The LMCI combines 19 labor market indicators and is designed to give a broad view of jobs market momentum.  The index confirms the Conference Board’s employment trends index, which also slowed in August.  Gad Levanon, chief economist for North America at the Conference Board remarked “The employment trends index is consistent with moderating job growth in the second half of 2016.” 

The Federal Reserve’s Beige Book, a summary of current economic conditions from 12 Fed districts, reported that the U.S. continues to experience “modest” economic growth in most districts.  However, key regions like New York and Kansas City showed no growth, and Philadelphia and Richmond reported slower economic growth.  The report showed rising wages, but inflation remains tame.  Most districts reported that labor markets remained tight, but price increases were described as “slight overall”.  Overall consumer spending was little changed in most districts, and auto sales declined slightly but remained at high levels.  Respondents indicated that they expected growth to continue at a “moderate” pace in coming months.

Consumer credit jumped to $17.7 billion in July as borrowing accelerated in July, supporting expectations that consumer spending will remain a key factor in economic growth.  Economists had expected an increase of “only” $16 billion.  In the second quarter, real consumer spending rose at an annualized 4.4% rate.  Non-revolving credit, such as student and auto loans, drove borrowing in July with a 6.7% annual gain in July, compared to a 2.4% annual gain the previous month.  Revolving credit, representing mostly credit card debt, rose at a 3.5% annual pace in July, down from June’s 11.5% spike.

The Canadian job market rebounded last month, creating 26,200 net new jobs In August and partially offsetting the loss of 31,200 jobs in July, according to Statistics Canada.  However, even with the improved jobs number, the unemployment rate crept up to 7% from 6.9% in July as more people entered the labor force.  Economists were expecting a gain of only 15,000 jobs.  TD Bank economist Brian DePratto wrote in a note to clients that “Job growth came from full-time employment, and the unemployment rate rose for the ‘right’ reason as more Canadians were engaged with job markets in August, reversing a four month trend.”

In the United Kingdom, the Organization for Economic Cooperation and Development (OECD) ate some crow regarding its earlier doom and gloom forecasts, admitting that Brexit will not have a major impact on the UK economy after all.  In addition, it stated that the global outlook now remains unchanged following the vote.  It was a major retreat from its forecast ahead of the referendum, when it warned that a Brexit vote would have a ‘large negative shock’ on the economy – rightly described as “scare tactics” by Brexit proponents.

German exports plunged in July, the latest in a string of weak economic data from Europe’s leading industrial economy.  The Federal Statistical Office, Destatis, reported that exports dropped -2.6% from June.  Even worse, exports were down -10% from July last year– the steepest twelve-month decline since the fall of 2009.  Industrial orders barely rose in July and output was down the most in nearly 2 years.  Demand for goods in countries outside of the EU, such as China, Russia, Japan, and the U.S. was down the most – more than -13% compared to July of last year.

The Italian statistics agency and Eurostat (the EU’s statistical arm) agree that Europe’s third-largest economy experienced no growth in the second quarter of 2016.  The data comes as another blow to Prime Minister Matteo Renzi as he prepares for a major referendum on constitutional reform.   The referendum aims to streamline Italy’s political system by giving more power to the prime minister.  There have been 63 Italian governments since the end of World War 2—many lasting just a few months – and governmental chaos is more the rule than the exception.

This week China hosted the G20 summit where world leaders gathered to discuss the shared challenges of encouraging global economic growth and avoid protectionist policies.  The fact that China hosted the event is further evidence of China’s ascension among the world’s economies.  China’s economic transformation has been one of the most dramatic in modern history.  Per capita incomes have risen six-fold in just over a decade, and the country holds the world’s largest amount of foreign exchange reserves.  According to the International Monetary Fund (IMF), China now accounts for more than 12% of world exports – more than any other single country. 

In Japan, the economy expanded at an annualized pace of +0.7% from the previous quarter, beating expectations of a +0.2% rise.  Improved capital expenditure figures, higher inventories, and strong public investment all contributed to the modest rise.  But business investment declined -0.1%, better than the expected fall of -0.4%, but still negative and down a second consecutive quarter. 

Finally, the housing market continues to power ahead month after month as we note prices rising and inventory continuing to shrink.  However, real estate consultant John Burns has dug deeper into the numbers and noted that while the housing market continues to move ahead (mostly on limited supply), a generation of home buyers is being left behind.  His research notes that home ownership rates have fallen across all age groups since the housing collapse in 2009, but the biggest drop has occurred in the millennial generation.  Burns predicts that the homeownership rates will continue to fall through 2025, meaning that millennials will be renting or living with their parents a lot longer than their own parents did.

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

The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market.  The average ranking of Defensive SHUT sectors was unchanged at 23.3, while the average ranking of Offensive DIME sectors fell to 15.8 from the prior week’s 15.3.  The Offensive DIME sectors remain higher in rank than the Defensive SHUT sectors.  Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

If you have any questions about the FBIAS™ Fact-Based Investment Allocation Strategy

portfolios, feel free to give your Anthony Capital, LLC advisor a call at 303-734-7178 or by scheduling a private virtual meeting/conference call.  We work with clients from all over the country and would be happy to help.

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

Sincerely,

Dave Anthony, CFP®, RMA®

FBIAS™ for the week ending 9/2/2016

FBIAS™ for the week ending 9/2/2016

The very big picture:

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

Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best.   The CAPE is at 27.07, up from the prior week’s 26.93, and only a little lower than the level reached at the pre-crash high in October, 2007.  Since 1881, the average annual return for all ten year periods that began with a CAPE around this level have been just 3%/yr (see graph below).

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

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate.  The U.S. Bull-Bear Indicator (see graph below) is in Cyclical Bull territory at 67.21, up from the prior week’s 66.70.

In the intermediate picture:

The Intermediate (weeks to months) Indicator (see graph below) turned positive on June 29th.  The indicator ended the week at 34, down from the prior week’s 35.  Separately, the Quarterly Trend 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 2016.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2 above), whether we are in a new Secular Bull or still in the Secular Bear, the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns.  The Bull-Bear Indicator (months to years) is positive (Fig. 3 above), indicating a potential uptrend in the longer timeframe.  The Quarterly Trend Indicator (months to quarters) is positive for Q3, and the Intermediate (weeks to months) timeframe (Fig. 4 above) is also positive.  Therefore, with all three indicators positive, the U.S. equity markets are rated as Very Positive.

In the markets:

Major U.S. indexes were positive across the board last week.  The Dow Jones Industrial Average rose +96 points to close at 18,491, up +0.5%.  The tech-heavy NASDAQ Composite added +31 points to 5,249, up +0.59%.  The LargeCap S&P 500 index gained +0.5%, while the MidCap (+1.22%) and SmallCap (+1.11%) indexes outperformed, continuing their trend of outperformance for most of this year.  Utilities and Transports were both in the green last week, with Transports rising +1.56%, while Utilities gained +0.9%.

Most international markets were also up for the week.  Canada’s TSX rebounded +1.06% following 2 weeks of losses.  In Europe, the United Kingdom’s FTSE rose +0.83%.  On Europe’s mainland, Germany’s DAX gained +0.91%, France’s CAC 40 index rallied +2.26%, and Italy’s Milan FTSE rose +2.02%.  In Asia, China’s Shanghai Stock Exchange fell slightly, down -0.1%, but Hong Kong’s Hang Seng Index added over +1.5% and Japan’s Nikkei surged a robust +3.45%.

In commodities, oil was down its second straight week, falling more than -6% to $44.44 a barrel.  Precious metals were a bit positive with Gold rising +$0.80 an ounce to $1,326.70, and silver up over +3.3% to $19.37 an ounce.  The CRB Index, an index that measures the overall direction of commodity sectors, declined more than -3.2%.

The month of August was pretty “blah” in the securities markets, with few markets moving more than +/- 1% from the flatline.  The Dow (-0.17%) and S&P 500 (-0.12%) were both slightly down, the MidCap 400 slightly up (+0.34%) and the SmallCap Russell 2000 was the biggest U.S. mover at +1.64%.  Developed International averaged +0.53% (EFA), while Emerging International averaged +0.88% (EEM).  The commodities markets were considerably more volatile than the stock markets, with gold falling more than -3% for the month, while oil gained a handsome +8%.

In U.S. economic news, the number of Americans who applied for unemployment benefits rose slightly last week, but remained near post-recession lows.  The Labor Department reported that 263,000 people filed for unemployment last week.  A reading below 300,000 is generally considered a sign of a healthy labor market.  New claims have remained in the 260,000 range over the past six weeks.  The four-week average of new jobless claims, smoothed to reduce volatility, fell slightly and also came in at 263,000.  New claims fell below the key 300,000 threshold in early 2015, and have remained there for 78 straight weeks, the longest stretch since 1970.  Continuing jobless claims, those already receiving unemployment benefits, rose by +14,000 to 2.16 million in the week ended August 20.  All figures are seasonally adjusted.

On Wednesday, payroll processor ADP reported that the private sector added 177,000 jobs last month.  In addition, July’s gain of 179,000 was revised up to 194,000.  Jim O’Sullivan, chief U.S. economist at High Frequency Economics said the data “continued to suggest that the trend in employment growth remains fairly strong – strong enough to keep the unemployment rate trending down.”  Economists frequently use ADP’s data to get an early indication of the Labor Department’s employment report released on Friday.

However, Friday’s release of the Labor Department’s Non-Farms Payroll report did not live up to expectations, coming in at 151,000 – far below the median forecast.  Nor did the unemployment rate come down, instead remaining unchanged at 4.9%.

The stock market decided that bad news was good news, and rallied on the sub-par payroll report on the theory that the report was bad enough to stave off an increase in interest rates by the Fed in September, but not bad enough to signal anything disastrous for the economy.

In housing, the Case-Shiller 20-city composite real estate index recorded a +0.8% monthly gain and is up +5.1% year-over-year.  Portland and Seattle continue to lead the pack with double-digit annual price increases of +12.6% and +11% respectively.  The formerly white-hot real estate market of San Francisco has slowed to its lowest rate since August 2012, but still up +6.4%.  House prices continue to run far ahead of inflation, as consumer prices rose just +1% annualized at the end of June.

Pending home sales in July reached their second highest reading in a decade, as a strong jobs market and record low mortgage rates support the demand.  The National Association of Realtors reported that its pending home sales index rose +1.3% in July, up +1.4% versus year ago levels, and the second strongest reading since April.  For the West, the index rose to the highest level in over three years.  Pending home sales refer to when a contract has been signed, but the transaction has not yet closed.  The National Association of Realtors forecast that existing home sales will reach almost 5.4 million units this year, an increase of +2.8% and the highest level since 2006.  In addition, the group forecasts median existing home price growth of +4%, down -2.8% from last year.

Americans increased spending by +0.3% in July, rising for the fourth straight month.  July’s rise was led by an uptick in spending on motor vehicles and services.  The increase in July matched Wall Street expectations.  Strength in household spending since the early spring has helped support the US economy and offset weaker business investment.

Consumer confidence is at the highest in nearly a year as the index rose +4.4 points to 101.1, exceeding analysts’ expectations.  The Conference Board reported that Americans’ current view of the economy is the strongest since the Great Recession.  The “present situation index”, which measures perceptions of current conditions, climbed almost +5 points to 123 – the highest level since late 2007.  However, the “future expectations index” of what consumers expect six months down the road, was less optimistic at 86.4.

In Chicago, the Chicago-region Purchasing Managers Index (PMI) fell -4.3 points to 51.5.  While PMI readings above 50 indicate expansion, the index had been hovering around 56 the last few months.  The measure reinforces the theory of a divide in the economy in which consumer spending remains strong, but businesses (particularly manufacturing businesses) are holding back.   The two other regional surveys from New York and Philadelphia were also soft in August.

The Institute for Supply Management’s (ISM) key manufacturing gauge fell into contraction last month, signaling continued difficulty in the factory sector.  ISM’s manufacturing index fell to 49.4 from 52.6 last month, widely missing expectations for a reading of 52 (any reading below 50 indicates contraction).  The last time the index was in contraction was February of this year.  Of the 18 different industries in the report, 11 had weakened from the prior month.  The key metrics of new orders, production, and employment were all below the 50-level.

In Canada, economic output shrank by its largest percentage since the global economic crisis as the country’s oil sector continued to face headwinds.  The Canadian government reported that GDP fell by -1.6% in the second quarter, the largest setback since 2009.  Wildfires in its oil producing region also weighed on production.  Sal Guatieri, senior economist at BMO Capital Markets stated the GDP report “could have been worse, given the hit from the wildfire, and clearly confirms the disappointing downward trend in exports over the last few months.”  It was not only energy that declined in the spring.  Declines in manufacturing exports also hit the economy, but the Bank of Canada is confident that exports will turn up and lead an expansion in the second half of the year.

In the United Kingdom, good news continues to accumulate following the voters’ decision to leave the EU despite in spite of warnings from politicians and economists.  Sterling rose to its highest level in four weeks against the dollar and the euro, while U.K. manufacturing output expanded in August.  Furthermore, market researcher GfK reported that its household confidence index regained half the ground lost prior to the vote.  It’s the latest indications that the nation’s fortunes outside of the European Union may not be nearly as dire as doomsayers had predicted. 

With German Chancellor Angela Merkel’s popularity at a 5-year low, she has now (like any politician worth her salt) flipped 180 degrees and is now supporting repatriations of “economic migrants”.  On Wednesday, Italian Prime Minister and the German Chancellor jointly agreed to step up efforts to send migrants with no right to asylum in Europe back to their homelands.  Renzi remarked, “All of us in Europe must work for the repatriation of those who do not have rights (to stay).  It is unthinkable that we can accommodate everyone.”  Chancellor Merkel added, “Not everyone can stay, and Italy has the same problem, so we have a common agenda.”  The German people, particularly young women, have suffered from widespread crime waves, especially sexual assaults and rapes, following the influx of over 1 million middle-eastern refugees.

The leaders of the world’s most important nations are in China this weekend for the annual G20 meeting.  This is the first time China is hosting a G20 summit, and like other major international events Beijing is pulling out all the stops to make it a success.  The government shut down local factories and restricted car traffic to generate cleaner air for the duration of the meeting.  Economic issues are set to dominate the agenda, with the global economy continuing to be plagued by a weak recovery and stagnant job growth.

In Japan, Japanese Prime Minister Shinzo Abe will meet Russian President Vladimir Putin on the sidelines of a business conference in Vladivostok to discuss closer economic cooperation in areas such as energy and technology.  Japan is hoping that deeper economic ties with Russia will strengthen strategic relations in the face of a rising China.  Former lawmaker Muneo Suzuki said broadening economic ties with an eye to the eventual resolution of the territorial dispute over islands in the western Pacific made sense because Russia’s energy resources and Japan’s technological expertise and investments were a good fit.

Finally, oil prices have stabilized in the $35/bbl-$50/bbl range recently, and may stay there for a while. With that price level in mind, it is interesting to take a look at the production costs per barrel of oil for the major oil producing nations around the world.

Interestingly, some of the most-stressed economies around the world are still producing oil at a bit of profit, but their government budgets were built on the assumption of much, much higher revenues from their oil production.  The most visible example of this genre is Venezuela – still above their cost of production, but with revenues far, far lower than anticipated.  The would-be socialist paradise has become a broken country of hyperinflation, rioting in the streets, government-imposed controls on everything and extreme scarcity of necessities.

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

The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market.  The average ranking of Defensive SHUT sectors rose slightly to 23.3, up from the prior week’s 23.5, while the average ranking of Offensive DIME sectors fell to 15.3 from the prior week’s 14.3.  The Offensive DIME sectors remain much higher in rank than the Defensive SHUT sectors.  Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

If you have any questions about the FBIAS™ Fact-Based Investment Allocation Strategy

portfolios, feel free to give your Anthony Capital, LLC advisor a call at 303-734-7178 or by scheduling a private virtual meeting/conference call.  We work with clients from all over the country and would be happy to help.

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

Sincerely,

Dave Anthony, CFP®, RMA®

FBIAS™ for the week ending 8/26/2016

FBIAS™ for the week ending 8/26/2016

The very big picture:

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

Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best.   The CAPE is at 26.93, down from the prior week’s 27.07, and only a little lower than the level reached at the pre-crash high in October, 2007.  Since 1881, the average annual return for all ten year periods that began with a CAPE around this level have been just 3%/yr (see graph below).

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

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate.  The U.S. Bull-Bear Indicator (see graph below) is in Cyclical Bull territory at 66.70, down from the prior week’s 69.62.

In the intermediate picture:

The Intermediate (weeks to months) Indicator (see graph below) turned positive on June 29th.  The indicator ended the week at 35, unchanged from the prior week.  Separately, the Quarterly Trend 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 2016.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2 above), whether we are in a new Secular Bull or still in the Secular Bear, the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns.  The Bull-Bear Indicator (months to years) is positive (Fig. 3 above), indicating a potential uptrend in the longer timeframe.  The Quarterly Trend Indicator (months to quarters) is positive for Q3, and the Intermediate (weeks to months) timeframe (Fig. 4 above) is also positive.  Therefore, with all three indicators positive, the U.S. equity markets are rated as Very Positive.

In the markets:

Stocks ended mostly lower for the week after worries of an upcoming Federal Reserve rate hike erased earlier gains.  The Dow Jones Industrial Average fell -157 points to 18,395, down -0.85%.  The tech heavy NASDAQ composite fared slightly better, down -0.37% to 5,218.  The LargeCap S&P 500 index fared the worst of the major indexes, falling -0.68%, while the S&P MidCap 400 index fell -0.2% and the SmallCap Russell 2000 managed to eke out a small gain of +0.1%.  Utilities continued their recent bad stretch, down -2.36% for the week and down more than -5% for August, driven by the twin forces of a risk-on shift and rekindled fears of rising interest rates.

International markets were mixed for the week, with the majority down.  Canada’s TSX fell -0.32%.  In Europe, the United Kingdom’s FTSE, likewise was down -0.3%, but on Europe’s mainland most markets gained.  Germany’s DAX rose +0.4%, France’s CAC 40 gained +0.94%, and Italy’s Milan FTSE surged +3.27% (retracing most of last week’s plunge).  In Asia, major markets were all in the red.  China’s Shanghai stock exchange was down -1.22%, Hong Kong’s Hang Seng was off a fractional -0.12%, and Japan’s Nikkei fell -1.12%.  Overall, the developed world ETF EFA was off -0.71%, while the emerging market ETF EEM lost over -2.2%.

Precious metals continued to lose their shine with Gold down $20.30 to $1,325.90 an ounce, a loss of -1.5%.  Silver, likewise, was down over -2.9% to $18.75 an ounce.  The industrial metal copper, sometimes used as a leading indicator of overall global economic activity, fell over -3.8%.  Oil had its first weekly loss in the last 4, declining -2.99% to $47.64 per barrel of West Texas Intermediate crude.

In U.S. economic news, the number of Americans who applied for unemployment benefits last week fell by 1000 to 261,000 and remained near post-recession lows.  The data indicates a healthy labor market with relatively few people losing their jobs.  The less volatile four-week average of new jobless claims fell by 1,250 to 264,000, according to the Labor Department.  Claims have remained below the 300,000 threshold for 77 straight weeks, the longest streak since 1970.  Continuing jobless claims, those already receiving benefits, fell by 30,000 to 2.15 million.  All figures are seasonally adjusted.

In housing, new-home sales surged to the highest level in nearly 8 years on strong demand from buyers and an increase in building activity.  On Tuesday, the Commerce Department reported that new home sales rose +12.4%, to a seasonally adjusted annual rate of 654,000 units last month.  The rate was +31.3% higher than this time last year, and easily beat economists’ forecasts of 581,000.  The median sales price of a new home last month stood at $294,600.  At the current sales pace, there is a 4.3 month supply of homes on the market.  As a caveat, the government’s new-home sales data can be quite volatile and comes with a large margin of error.  However, Trulia Chief Economist Ralph McLaughlin released a note stating that last month’s figures “are a rare case where the year-over-year change is statistically significant, indicating the surge in sales can be taken with more than just a grain of salt.”

In contrast to the surge in new-home sales, sales of previously owned homes fell last month as tight inventory weighed on the market and pushed prices higher.  Existing home sales declined -3.2% to a seasonally adjusted annual rate of 5.39 million, according to the National Association of Realtors (NAR).  The rate was -1.6% lower than this time last year and missed economists’ forecasts of 5.48 million.  NAR Chief Economist Lawrence Yun attributed the decline to leaner inventory and higher prices.  Inventory was -5.8% lower than this time last year and the 14 consecutive month of year-over-year declines.  The median home price was $244,100, +5.3% higher than a year ago.  As housing prices rise at a faster rate than wages, it is much harder for renters to become owners, Yun stated. 

U.S. durable goods orders posted their biggest gain since last fall, up +4.4% last month, according to the Commerce Department.  Orders for commercial planes surged +90% last month after plunging -60% in June.  Defense orders also contributed to the gain.  After stripping out the volatile transportation sector, orders rose a smaller +1.5% (but still the biggest increase of the year).  Another positive sign was the first rise in inventories in over six months.  Orders for core capital goods had their second straight gain and their biggest increase since January, rising +1.6%.  Core capital goods orders (durable goods minus aircraft and defense orders), are viewed as a proxy for future business investment.

Markit’s flash manufacturing Purchasing Managers Index (PMI) fell -0.8 to 52.1 in August after reaching a 9-month high in July.  Chris Williamson, chief business economist at Markit stated “taking the July and August readings together suggests that manufacturing is enjoying its best growth so far this year in the third-quarter, and should help drive stronger GDP growth.”  Output showed a solid increase this month, while slower growth in total new work and employment, and inventories weighed on the overall headline number.  While remaining above 50 (indicating improving conditions), August’s reading was weaker than the post crisis average of the index.

Consumer sentiment slipped slightly in August as Americans views of their personal finances dimmed a bit.  The University of Michigan’s consumer sentiment survey declined -0.2 point to 89.8 last month, -2.3% lower than year ago.  Economists had expected a reading of 91.  The current economic conditions sub-gauge fell -2 points to 107, while the index of consumer expectations rose +0.9 to 78.7.

On Friday, Federal Reserve Chairwoman Janet Yellen said that the case for another interest rate hike “is strengthening”, sending a signal that the US central bank could raise rates as soon as next month.  “In light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months,” Yellen remarked in a speech in Jackson Hole, Wyoming.  Yellen reaffirmed that the Fed policy committee “continues to anticipate” that gradual increases in the fed-funds rate will be appropriate.

The U.S. economy grew at a rather weak +1.1% annualized rate in the second quarter on the heels of weaker business investment and government spending.  The original estimate had been for a +1.2% gain.  Personal consumption expenditures increased at an annual rate of +4.4% for the quarter with strong growth in durable goods purchases of 9.9% and solid growth in services, up 3.1%.  In the details of the report, corporate profits decreased -$24.1 billion in the second quarter, following an increase of +$66 billion in the first.  Adjusted pretax corporate earnings dropped -1.2% to mark the fifth earnings decline in the last six quarters.  Unless profits turn up again, the economy is unlikely to grow much faster.

In Canada, the financial impact of wildfires in May that reduced total Canadian oil production and subsequent lower revenues are taking a toll, a provincial leader said.  The provincial government of Alberta said it experienced a net fiscal impact of about $387 million from the wildfires.  Alberta’s finance minister said the provincial economy is expected to run an $8.3 billion deficit, $400 million greater than previously estimated.  “Our government continues to take a prudent approach, controlling spending, protecting critical public services, and taking action to create jobs and diversify our economy,” Finance Minister Joe Ceci said in a statement.

In the United Kingdom, economic growth during the second quarter remained relatively robust.  The revised second-quarter GDP data registered +0.6% growth in the three month leading up to the Brexit vote, according to data released by the Office for National Statistics.  Household expenditures increased +0.9% for the quarter, the strongest reading since fall of 2014.  The strong readings indicate that the uncertainty over the outcome of the Brexit referendum did not have a major negative impact on second quarter investment.

Confidence has plunged in the German economy since Britain voted to leave the European Union.  Business morale in Europe’s biggest economy tumbled in August at its fastest rate since the height of the Eurozone debt crisis in 2012, according to the economic institute IFO survey.  The survey’s reading of 106.2 is now sitting at its lowest level since February.  At the same time, another index measuring corporate expectations in the country fell to the lowest level since October 2014.  IFO head Clemens Faust remarked “business confidence in Germany has clearly worsened.”

In France, new data suggests that the G-7 economy continues to struggle to find growth.  The data shows that even before the recent wave of terror attacks, French GDP growth was nil in the second quarter, according to the national statistics agency.  That is a sharp slowdown from the +0.7% rise in the first quarter. 

Japanese manufacturing got a boost as Markit’s flash PMI reading for August came in at 49.6, versus 49.3 in July.  The output sub-index rose into expansion at 50.6, a positive development for a sector that has been stuck in negative territory all year.  IHS economist Annabel Fiddes stated “ Japan’s manufacturing sector edged closer to stabilization in August, but the latest batch of PMI data gave a mixed picture overall.”  Japanese policymakers are reevaluating their stimulus efforts as the economy continues to struggle.  Analysts are expecting a new stimulus drive the latter part of this year, based on a pre-election promise by Prime Minister Shinzo Abe.

Finally, last Sunday’s closing ceremony signaled the end of the 2016 Summer Olympics.  Now that the party is over, the hangover has set in as organizers calculated the final cost of hosting the event.   Online statistics portal Statista reported “The organizers have put in a huge amount of work and invested an impressive amount of cash to get to this point…Costs ran 51% over budget in Rio, ending up at $4.58 billion.  Even though that may seem like a huge amount of money, it pales in comparison to the Winter Olympics in Sochi in 2014.  Costs there quickly snowballed with many venues coming in catastrophically over budget…Hosting the Olympics is expensive with the people of Hamburg (Germany) voting to withdraw their city’s bid for the 2024 games in late 2015, primarily on funding grounds.”

The following graphic shows the costs of hosting each of the Olympics since 1992, and their staggering overruns.  Note that not a single one came in at or under budget.

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

The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market.  The average ranking of Defensive SHUT sectors fell again to 23.5, down from the prior week’s 23.0, while the average ranking of Offensive DIME sectors was unchanged from the prior week at 14.3.  The Offensive DIME sectors are now much higher in rank than the Defensive SHUT sectors.  Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

If you have any questions about the FBIAS™ Fact-Based Investment Allocation Strategy

portfolios, feel free to give your Anthony Capital, LLC advisor a call at 303-734-7178 or by scheduling a private virtual meeting/conference call.  We work with clients from all over the country and would be happy to help.

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

Sincerely,

Dave Anthony, CFP®, RMA®

FBIAS™ for the week ending 8/19/2016

FBIAS™ for the week ending 8/19/2016

The very big picture:

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

Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best.   The CAPE is at 27.07, little changed from the prior week’s 27.08, and only a little lower than the level reached at the pre-crash high in October, 2007.  Since 1881, the average annual return for all ten year periods that began with a CAPE around this level have been just 3%/yr (see graph below).

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

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate.  The U.S. Bull-Bear Indicator (see graph below) is in Cyclical Bull territory at 69.62, up from the prior week’s 67.41.

In the intermediate picture:

The Intermediate (weeks to months) Indicator (see graph below) turned positive on June 29th.  The indicator ended the week at 35, unchanged from the prior week.  Separately, the Quarterly Trend 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 2016.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2 above), whether we are in a new Secular Bull or still in the Secular Bear, the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns.  The Bull-Bear Indicator (months to years) is positive (Fig. 3 above), indicating a potential uptrend in the longer timeframe.  The Quarterly Trend Indicator (months to quarters) is positive for Q3, and the Intermediate (weeks to months) timeframe (Fig. 4 above) is also positive.  Therefore, with all three indicators positive, the U.S. equity markets are rated as Very Positive.

In the markets:

Trading was mixed in U.S. markets last week as most segments were little changed to slightly lower.  Trading volumes were also lackluster despite the Federal Reserve releasing the minutes from its July policy meeting.  The Dow Jones Industrial Average barely moved, down -23 points to 18,552.  The tech heavy NASDAQ composite rose only slightly, +5 points to 5,238.  Transports moved the strongest on the continued strength in oil, rising +1.58%.  This seems counterintuitive, since transport companies are oil consumers, but the rise in oil prices implies more rail traffic hauling oil as production comes back following price improvement.  The Utilities sector gave up -1.29%.  The LargeCap S&P 500 was essentially flat (-0.01%), while MidCaps and SmallCaps showed strength with the S&P 400 MidCap index rising +0.32% and the Russell 2000 SmallCap index adding +0.57%.

In international markets, Canada’s TSX fell -0.41%.  Weakness was also fairly wide-spread in Europe where the United Kingdom’s FTSE fell -0.83%.  On mainland Europe, Germany’s DAX ended down -1.58%, France’s CAC 40, declined -2.21%, and Italy’s Milan FTSE plunged -4.05%.  In Asia markets were mixed. Japan’s Nikkei gave up 2.21%, but Hong Kong’s Hang Seng index rose +0.75% and China’s Shanghai stock exchange added +1.88%.  Developed International markets as a group declined -0.03% (EFA), while Emerging International markets as a group rose +0.32% (EEM).

In commodities, precious metals were mixed with gold rising +0.22% or $3 to $1346.20 an ounce, while silver fell 1.96% to $19.32 an ounce.  The industrial metal copper was up +1.26%.  The big news was in oil, which surged +$4.62, or +10.38%, to $49.11 a barrel for West Texas Intermediate crude oil.

In U.S. economic news, first time filings for unemployment benefits remained below the 300,000 benchmark for a 76th straight week.  Jobless claims fell 4,000 to 262,000, a one month low, and a sign that the labor market remains healthy.  Economists had forecasted 265,000.  The smoothed 4-week average of claims rose 2,500 to 265,250 according to the Labor Department.  Continuing claims, those already receiving benefits, rose 15,000 to 2.18 million.

The National Association of Home Builders reported that builder confidence in the market for new single-family homes rose more than expected in August.  The Home Builders Index rose +2 points to 60, beating economists’ expectations of 59.  In the details of the report, the sub-index for current sales conditions rose +2 points to 65 and the index of expected conditions over the coming six months increased +1 to 67.  However, the index that tracks buyer traffic dropped -1 point to 44.  Readings over 50 indicate expansion.  The NAHB stated “New construction and new-home sales are on the rise in most areas of the country, and this is helping to boost builder sentiment.” A rebound in multifamily units lifted housing starts to the second highest rate since the recession began.  Home builders broke ground on more units than expected in July on strong demand for housing and confidence in the economy.  Housing starts ran at a seasonally adjusted 1.2 million annual rate, according to the Commerce Department, up +2.1% over June.  Starts for single-family homes edged up only a slight +0.5% to a 770,000 annual pace.  The big increase was in multifamily starts which surged +8.3% to a 433,000 annual rate.  Overall, housing starts are up +5.6% compared to year ago.  Giving an indication of future activity, building permits were at a 1.15 million annual rate last month, matching June’s reading.

U.S. manufacturing reports were mixed this week as two different Fed manufacturing reports were released.  Manufacturing conditions in the New York region weakened in August as the Empire State Index reverted back to negative territory, according to the New York Fed.  The index for August fell to -4.2 from 0.6 in July, missing forecasts.  On a positive note, in the details of the report new orders were positive and shipments improved.  Ian Shepherdson, chief economist at Pantheon Macroeconomics stated “Overall, we think manufacturing is now expanding slowly, but no boom is in prospect.”  In the second report, the Philadelphia Fed reported that its manufacturing index returned to positive territory to 2.0 from -2.9.  However, that positive number was influenced mostly on hope of a better future as the gauge for future general activity rose +12 points to 45.8, rather than actual current conditions.  The new orders index plunged to -7.2 from 11.8 in July, and the employment index collapsed -18 points to -20.  The Philly Fed report stated “The survey’s future indicators suggest that firms expect the current weakness to be temporary.”

The cost of consumer goods was unchanged in July, as inflation remained tame for almost everything Americans purchase.  The Labor Department reported that the consumer price index (CPI) was unchanged in July, and up only +0.8% compared to a year ago.  The index is at a five month low.  Core CPI, which excludes food and energy increased +2.2% on an annualized basis down -0.1% from last month.  This missed analyst forecasts, which forecasted a +0.2% increase.  The cost of food was unchanged in July and has risen only +0.2% over the past year.  Energy prices declined -1.6%, and are down over -10.9% for the year.  Real hourly wages (wages adjusted for inflation) increased +0.4% in July and are now up +2.0% annualized.  However, that lags the increases Americans are seeing in some nondiscretionary costs.  For example, rent is up over +3.8% compared to a year ago, and medical care prices have risen over +4.1%.

This week, minutes from the Federal Reserve meeting in July revealed that Fed officials expressed relief that concerns over “Brexit” were overblown and that the job market remained healthy.  However, there was division over the timeline to raise rates.  Two Fed officials pushed for a rate hike at the July meeting, however the majority voted to wait for more information.  Fed officials voted 9-1 to hold rates at their current levels.  As usual, the minutes do not elaborate on the timing of a Fed move, using the keywords “open” and “flexible” to describe when they will act.  Sal Guatieri, senior economist at BMO Capital Markets stated “The Fed is inching closer to a rate hike, but it likely isn’t there yet…It will take further evidence that the economy is picking up, including another strong jobs report in August, to spur a move as early as September.”

In Canada, the manufacturing sector received some much-needed good news as Statistics Canada reported that June’s factory sales came in at an unexpectedly strong +0.8%.  Analysts had forecasted a rise of +0.7%.  The gain followed a -1% drop the previous month.  The difference amounts to about a $50.2 billion gain to the Canadian economy.  Ontario was the main province driving the gains, which were led by machinery and transportation equipment.  Overall, sales were up in 15 of the 21 industries tracked by the Canadian federal data agency.

In the United Kingdom, British retail sales last month smashed expectations and jumped +1.4% compared to the previous month.  The result provided further evidence that mainstream economists from world-renowned institutions were (so far) completely wrong on the effect of the UK’s “Brexit” vote.  Economists had expected only a paltry +0.1% rise.  Trevor Charsley, senior markets adviser at London-based money transfer frim AFEX said: “The retail sales figures, coming hot on the heels of inflation and unemployment data, complete a hat-trick of U.K. data releases this week that paint a healthier-than-expected picture of the U.K. economy.”

In contrast, Germany’s ZEW think-tank reported economic sentiment missed expectations.  The actual reading improved slightly in August, but remained below its long-term average.  ZEW President Achim Wambach said that their indicator has “partly recovered from its Brexit shock.”  The indicator rose to 0.5 from -6.8, while the long-term average stands at 24.2.   Germany’s economy weakened in the second quarter after a very strong first quarter.  The Federal Statistics Office reported that quarterly growth eased to 0.4% from 0.7% in the first quarter. 

The French unemployment rate fell below 10% for the first time since 2012.  French statistics agency Insee reported that unemployment on mainland France and its overseas territories fell to 9.9% last quarter, down from 10.2%.  French President Francis Hollande has said that he would not stand for re-election in 2017 unless there was a sustained fall in unemployment this year.  Unemployment was down in all age categories, with youth unemployment falling the most, down -0.4% to 24.3% – the lowest since 2014.

In Asia, Moody’s Investor Services raised its forecasts for China’s economic growth in the wake of “significant” fiscal and monetary stimulus policies.  Moody’s raised its economic growth forecasts for the mainland to 6.6% for this year, from 6.3% previously.  Madhavi Bokil, senior analyst at Moody’s stated “The slowdown and rebalancing of China’s economy is likely to be gradual, thus we do not expect China to exert a significant drag on global growth prospects over the rest of 2016 and 2017.”  Analysts also expect that this slowing would likely spur additional stimulus measures from the People’s Bank of China.

Japanese manufacturing took a hit as the mood of manufacturers’ soured to its lowest level in 3 years, according to a Reuters poll.  The Reuters economic survey (known in Japan as the Tankan) followed data that showed exports had tumbled in July the most since 2009 and that economic growth had stalled in the second quarter.  Yuichiro Nagai, economist at Barclays Securities, laid out the fundamental problem: “The recent indicators confirm that external and domestic demand are both weak.  With the yen’s rise and consumers tightening their belts, companies find it harder to justify raising prices.  As such, a complete end of deflation remains out of sight.”

Finally, while the economic news of late has focused on the strong housing market and rising real estate prices there is a significant downside to the good news.  According to a new study by Zillow, an amazing 86% of Americans who are renters no longer have a sufficient credit score or income to afford to buy a home in their local market. 

Home ownership rates have been on a steady decline and are now near a 48-year low (see the chart below).  Adding to the difficult situation is that real household incomes have dropped 9% while rents have increased 7% over the last 13 years.  The poor home ownership situation will likely persist, since nearly half of today’s renters spend more than 30% of their pre-tax income on housing. 

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

The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market.  The average ranking of Defensive SHUT sectors fell again to 23.0, down from the prior week’s 19.8, while the average ranking of Offensive DIME sectors rose to 14.3 from the prior week’s 17.3.  The Offensive DIME sectors are now much higher in rank than the Defensive SHUT sectors.  Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

If you have any questions about the FBIAS™ Fact-Based Investment Allocation Strategy

portfolios, feel free to give your Anthony Capital, LLC advisor a call at 303-734-7178 or by scheduling a private virtual meeting/conference call.  We work with clients from all over the country and would be happy to help.

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

Sincerely,

Dave Anthony, CFP®, RMA®

FBIAS™ for the week ending 8/12/2016

FBIAS™Fact-Based Investment Allocation Strategies for the week ending 8/12/2016

The very big picture:

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

Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best.   The CAPE is at 27.08, little changed from the prior week’s 27.06, after having earlier reached the level also reached at the pre-crash high in October, 2007.  Since 1881, the average annual return for all ten year periods that began with a CAPE around this level have been just 3%/yr (see graph below).

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

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate.  The U.S. Bull-Bear Indicator (see graph below) is in Cyclical Bull territory at 67.41, up from the prior week’s 65.11.

In the intermediate picture:

The Intermediate (weeks to months) Indicator (see graph below) turned positive on June 29th.  The indicator ended the week at 35, unchanged from the prior week.  Separately, the Quarterly Trend 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 2016.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2 above), whether we are in a new Secular Bull or still in the Secular Bear, the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns.  The Bull-Bear Indicator (months to years) is positive (Fig. 3 above), indicating a potential uptrend in the longer timeframe.  The Quarterly Trend Indicator (months to quarters) is positive for Q3, and the Intermediate (weeks to months) timeframe (Fig. 4 above) is also positive.  Therefore, with all three indicators positive, the U.S. equity markets are rated as Very Positive.

In the markets:

U.S. stocks were mixed and little changed last week as the Dow Jones Industrial Average, the S&P 500, and the Nasdaq Composite all posted new all-time highs during the week, but MidCap and SmallCap indexes were slightly lower.  For the week, the Dow Jones Industrial Average added a modest +32 points to end the week at 18,576.  The LargeCap S&P 500 also finished with a very slight gain of +0.05%.  The NASDAQ Composite rose +11 points to 5,232, up +0.23%.  MidCaps and SmallCaps, which have been the biggest gainers year-to-date, finished slightly in the red.  The S&P 400 MidCap index gave up -0.31% and the SmallCap Russell 2000 finished down a slight -0.12%.

International markets had a strong week compared to the U.S., as almost all major indexes finished in the green.  Canada’s TSX rose +0.67%.  In Europe, the United Kingdom’s FTSE rallied another +1.8%.  The UK’s FTSE has risen 7 out of the past 8 weeks and is once again nearing all-time highs.  Proving once again that predictions are futile, economists from major institutions and think tanks worldwide had predicted that the “Brexit” vote would plunge the United Kingdom into economic chaos and a certain depression.  On Europe’s mainland, Germany’s DAX rallied +3.34%, France’s CAC 40 was up +2.03%, and Italy’s Milan FTSE added +2.23%.  In Asia, China’s Shanghai Stock Exchange added +2.49%, ending 3 weeks of losses.  Japan’s Nikkei was the big winner, up over +4% last week, and Hong Kong’s Hang Seng Index rose 2.8%.  As a group, Developed International markets rose +1.8% (EFA), and Emerging Markets rose +2.4% (EEM).

In commodities, precious metals had a second down week with Gold giving up -$1.20 to close at $1,343.20 an ounce.  Silver, almost always more volatile, was also down a second week, giving up -0.58% to end the week at $19.70 an ounce.  The industrial metal copper was also negative, losing -0.65%.  Energy had a strong week, adding to gains from the prior week as West Texas Intermediate crude oil rallied over +6.4% to $44.49 a barrel. 

In U.S. economic news, the Labor Department’s Job Openings and Labor Turnover Survey (known by the amusing acronym “JOLTS”) indicated the job market remains resilient.  Job openings and hiring increased as the JOLTS report showed there were 5.62 million job openings in June, up from 5.51 million in May.  In addition, there were 5.13 million people hired during the month, up 80,000 from May.  In the Labor Department’s Weekly Jobless Claims report, the number of people filing for unemployment benefits declined by -1,000 to a seasonally adjusted 266,000 for the first week of August.  Initial claims have held below the key 300,000 threshold for 75 weeks in a row, the longest streak since 1970.  Economists had forecasted a decline of- 2,000.  The smoothed 4 week average of claims rose slightly to 262,750.  Continuing claims, those people already receiving benefits rose by 14,000 to 2.16 million.

Sentiment among small-business owners managed a slight gain according to the National Federation of Independent Business (NFIB).  However, the NFIB confidence index still remains below its long-term average, despite rising for the fourth straight month.  The NFIB optimism index rose +0.1 point to 94.6, beating analyst expectations of a flat reading.  Last month, 4 of the 10 NFIB indexes rose, while 4 declined, and 2 were unchanged.  In its statement, the NFIB stated that, “small businesses continue to be in maintenance mode– meaning owners won’t increase spending.” 

Retail sales in the U.S. paused in July after three straight months of gains the Commerce Department reported.  Sales were essentially flat after a gain of +0.8% in June.  Economists had expected growth of +0.4% for July.  Auto sales were up +1.1% in July, the strongest since April.  However, removing auto sales, retail sales were actually down 0.3% – the weakest reading since January.  Retail sales are a key element of consumer spending, which is the backbone of the U.S. economy.  On an annualized basis, retail sales are up +2.3% over the past 12 months.  Ian Shepherdson, Chief Economist at Pantheon Macroeconomics stated “retail sales were disappointing, but not disastrous”.  Amazon and other Internet-only retailers saw a gain of +1.3%, while Macy’s announced the closing of 100 stores.

Productivity declined for the third straight quarter, according to data released by the Labor Department.  In the second quarter, productivity fell -0.5%, well below expectations.  Economists had forecast a +0.3% gain.  Annualized, productivity is down -0.4% for the trailing year, the first year-over-year decline since mid-2013.  Productivity measures how much an employee produces per hour of work.  Higher productivity is linked to a rising standard of living for workers because it tends to lead to higher wages and larger profits for companies.  The long-term rate of productivity increase has traditionally been +2.2% per year.

The Labor Department reported that the price of imports to the U.S. rose for a fifth straight month, up +0.1% in July.  Higher costs of imported goods theoretically should support a rise in inflation, which has remained below the Federal Reserve’s targeted level for years.  Even with July’s rise, however, the cost of imports is still -3.7% lower than a year ago.  Export prices increased +0.2% last month, the fourth consecutive rise, but remain 3% lower than this time last year.

In Canada, a CIBC economist warned that intervention into two of Canada’s hottest housing markets could interfere with economic growth.  Canada’s economy is facing difficult headwinds, but two bright spots remain the Vancouver and Toronto housing markets.  In a research note, CIBC Chief Economist Avery Shenfeld said cracking down on the sector, which accounts for the largest portion of domestic GDP, could smother the little economic growth there is.  “Interest rate hikes or much tougher mortgage policies could put a damper on house prices, but at the expense of economic growth,” he stated. 

In the United Kingdom, fears of the consequences of the UK leaving the European Union appear to have been hugely overblown, as retail spending rebounded +1.9% in July.  The increase was the biggest rise in 6 months and up sharply from the +0.2% increase in June.

In Germany, economic growth flattened in the second quarter of the year, sparking fears that Europe’s largest economy may be running out of steam.  GDP grew by just +0.4% in the 2nd quarter, down sharply from the 1st quarter’s +0.7% gain.  Investment in construction and machinery was particularly weak.  The headline reading was supported by higher exports and strong state spending.

The latest Italian GDP readings show that the economy is also stagnant, with 0% growth in the 2nd quarter following a +0.3% rise in the 1st.  Italian Prime Minister Mario Renzi is battling to reduce bad debt in Italy’s banking sector, which is currently carrying approximately 360 billion euro worth of bad loans.  Alberto Bagnai, economic policy professor at the University of Chieti-Pescara said, “There is no way to solve the banking problem without economic growth.  If the whole nation doesn’t start earning more it simply can’t pay back its debts—public or private.”

Fresh Chinese economic data added to a multitude of other metrics that suggests the world’s second largest economy is weakening.  Both industrial output and retail sales fell short of expectations for the month of July.  A spokesman for China’s National Statistics Bureau said that the country’s economy was still in a period of adjustment and is facing downward pressure.

Finally, the folklore of the markets has always been that complacency in the markets is bad news, as it is thought to precede substantial declines.  One way to measure complacency is by measuring fear, on the theory that fear is the opposite of complacency.  A widely followed “fear gauge” is the Chicago Board Options Exchange Volatility Index, known as “VIX”, which measures the activity of “put” and “call” option buying/selling.  Nervous and fearful investors buy lots of puts for downside protection, which results in the VIX going higher – thus the moniker “fear gauge”.

As many of the market’s indexes hit new highs last week the VIX dropped to an extremely low 11.18, suggesting investors are very complacent.  Many investors have become alarmed at the low VIX readings, believing that the absence of fear is a very bad sign.  However, researchers at the National Bureau of Economic Research (reported by Mark Hulbert at marketwatch.com) decided to dig deeper into historical data to see if that interpretation was correct.  What they found was that the stock market’s performance following low “complacent” VIX readings is no worse, on average, than it is after higher readings.   Perhaps another piece of Wall Street folklore can be consigned to the crowded category of “sounds good, but isn’t true!”

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

The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market.  The average ranking of Defensive SHUT sectors fell sharply to 19.8, down from the prior week’s 14.8, while the average ranking of Offensive DIME sectors rose to 17.3 from the prior week’s 18.3.  The Offensive DIME sectors are now higher in rank than the Defensive SHUT sectors.  Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

If you have any questions about the FBIAS™ Fact-Based Investment Allocation Strategy

portfolios, feel free to give your Anthony Capital, LLC advisor a call at 303-734-7178 or by scheduling a private virtual meeting/conference call.  We work with clients from all over the country and would be happy to help.

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

Sincerely,

Dave Anthony, CFP®, RMA®

FBIAS™ for the week ending 8/5/2016

FBIAS™ for the week ending 8/5/2016

The very big picture:

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

Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best.   The CAPE is at 27.06, up from the prior week’s 26.95, after having earlier reached the level also reached at the pre-crash high in October, 2007.  Since 1881, the average annual return for all ten year periods that began with a CAPE around this level have been just 3%/yr (see graph below).

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

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate.  The U.S. Bull-Bear Indicator (see graph below) is in Cyclical Bull territory at 65.11, up from the prior week’s 62.72.

In the intermediate picture:

The Intermediate (weeks to months) Indicator (see graph below) turned positive on June 29th.  The indicator ended the week at 35, down 1from the prior week.  Separately, the Quarterly Trend 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 2016.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2 above), whether we are in a new Secular Bull or still in the Secular Bear, the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns.  The Bull-Bear Indicator (months to years) is positive (Fig. 3 above), indicating a potential uptrend in the longer timeframe.  The Quarterly Trend Indicator (months to quarters) is positive for Q3, and the Intermediate (weeks to months) timeframe (Fig. 4 above) is also positive.  Therefore, with all three indicators positive, the U.S. equity markets are rated as Very Positive.

In the markets:

A 1% rally on Friday rescued a theretofore losing week, pushing U.S. markets into positive territory for the week.  The gains pushed the Nasdaq Composite into record territory, joining the Dow Jones Industrial Average, the LargeCap S&P 500, and the MidCap S&P 400 index.  The SmallCap Russell 2000 reached a new high for 2016, but remains below a peak set in the middle of 2015.  The Dow Jones Industrial Average added 111 points last week to end at 18,543, up +0.6%.  All other indices were positive, with the LargeCap S&P 500 rising +0.43%, the MidCap S&P 400 index adding +0.2%, while the SmallCap Russell 2000 and the NASDAQ Composite pulled away from the others, gaining +0.93% and +1.14% respectively.

In international markets, Canada’s TSX added an additional +0.45% last week supported by a modest rebound in the price of oil.  In Europe, the United Kingdom’s FTSE gained over +1%, France’s CAC40 fell -0.66%, while Germany’s DAX added +0.29%.  Italy’s MIB fell -1.3% as concern remains among analysts about the financial stability of several of Italy’s largest banks.  Asian markets were also mixed as Japan’s Nikkei gave up more than 1.9%, but Hong Kong’s Hang Seng rose +1.1%.  China’s Shanghai Stock exchange was basically flat, down -0.09%.

In commodities, defensive investments like precious metals had a difficult week, with Gold settling down -$13.50 to $1,344.40 an ounce, down -0.99%.  Silver likewise fell below the $20 handle, ending at $19.82 an ounce down 2.6%.  Oil rebounded slightly, as West Texas Intermediate crude oil closed at $41.80/bbl, up +0.48%.  Copper continued its volatile up and down swings of late, losing over -3%.

In U.S. economic news, the labor department reported that the U.S. economy added 255,000 jobs in July, well above the expected 180,000. The unemployment rate remained unchanged at 4.9 percent.   “The jobs report was incredibly impressive,” said JJ Kinahan, chief strategist at TD Ameritrade. “What I think it did, is it took the May report and made it into an anomaly.”  May’s jobs report, you may recall, was a shockingly low 38,000.

Payroll processor ADP reported that private-sector hiring remained robust as employers added 179,000 jobs last month.  Economists had expected a gain of only a 165,000.  ADP’s reports have shown steady job growth while the Labor Department’s employment report has been more volatile.  Mark Zandi, chief economist at Moody’s Analytics, stated that with underlying job growth of about 150,000 to 200,000, the labor market remains strong.

Growth in manufacturing slowed slightly in July but still remained in expansion according to the Institute for Supply Management’s (ISM) latest survey.  The ISM manufacturing index declined 0.6 point to 52.6.  Readings over 50 indicate more companies are expanding rather than shrinking.  The index has been positive for the fifth straight month following negative readings from last fall into February.  Most executives reported that business remains solid and felt little to no impact from the Brexit vote.  ISM’s new orders index remained strong at 56.9, production also gained coming in at 55.4.  On a negative note, the employment sub-index fell back into negative territory, losing a point to 49.4.  Manufacturers have cut roughly 30,000 jobs in the past year, according to both ADP and the Labor Department.

Confirming the ISM survey was Markit’s manufacturing Purchasing Managers Index (PMI), which also came in at an 8-month high of 52.9.  The PMI report showed that manufacturing had a strong start to the 3rd quarter.  Foreign markets were the source of increased demand that helped push export sales to the fastest pace since September 2014.  Chris Williamson, Markit chief economist, noted that the stronger PMI in July “suggests that manufacturers and exporters have helped lift the economy at the start of the third quarter.” 

Switching to services, ISM’s service index reports most U.S. companies are growing.  Companies that offer services such as healthcare, retail goods and entertainment continued to grow, but at a slightly slower pace, according to a survey of senior executives.  The ISM’s nonmanufacturing index fell to 55.5 last month, still firmly in expansion territory (above 50).  A healthy 15 of the 18 service sectors tracked by the ISM report showed growth.  The new orders index rose to a very strong 60.3, a positive sign for the broader economy.  The only soft spot in an otherwise great report was the employment sub-index, which fell 1.3 to 51.4.

Backing up the services report, the government reported that consumer spending rose +0.4% in June, the third consecutive month of solid increases.  On a quarterly basis, spending in the second quarter of this year marked the biggest quarterly gain since the recovery began in 2009.  Most of the increase in spending was on services such as housing, healthcare, entertainment and utilities. Income growth, however, did not match the increase in spending.  Incomes rose only +0.2% in June, slightly less than expected.

In International economic news, the Canadian economy is now growing at the slowest pace in 60 years and the housing market is about the only thing keeping it in expansion, according to economists.  Friday’s GDP report revealed that in the two years since oil prices began their decline, Canada’s economy has become almost completely reliant on bank lending and the hot housing markets of Vancouver and Toronto.  Real estate and financial services now account for approximately 20% of the Canadian economy, levels not seen since the early 1960’s.  Since May of 2014, Canada’s economy has expanded just 1.2% – the slowest 2-year pace outside of recession in the last 6 decades, according to Statistics Canada.

Markit’s European manufacturing PMI for July was revised up to 52, slightly better than the original print, but containing very mixed results.  Markit said that most of the growth was seen in Germany, but growth had almost stalled in both Italy and Spain, and France and Greece were both in contraction.

In the United Kingdom, the Bank of England dropped its key benchmark interest rate a quarter point to 0.25%, the lowest level ever, and telegraphed that the rate could go even lower in the months ahead.  The bank also started a new funding program that offers lenders cheap 4-year loans in order to lend to households and businesses.  Overall the measures were much larger than markets anticipated, driving the British pound down and the 10-year UK government bond yield down to a record low.

Despite being the bright spot in the European PMI report (above), Germany, Europe’s largest exporter of manufactured goods, reported that its factory orders fell -0.4% in June, widely missing estimates that they would rise +0.5%.  The sharp drop was due to a lack of orders from within the Eurozone.  On a positive note, domestic orders rose +0.7% and orders from non-Eurozone states rose +3.8%.

Japanese Prime Minister Shinzo Abe approved an economic stimulus package totaling 28.1 trillion yen (approximately $275 billion) in a further effort to stimulate the Japanese economy and spur inflation.  The measures include substantial infrastructure spending and enhancements to welfare services.  According to Kyodo news, Abe told party leaders, “We want to not only stimulate immediate demand, we aim to pursue sustainable economic growth…and ensure the creation of a society in which all people can play active roles.”  The effects on Japan’s already-staggering debt load were not discussed.

China’s National Development and Reform Commission (NDRC), the research arm of China’s top economic planning agency, called for a cut in interest rates and the reserve requirement for banks. The NDRC’s comments were noted by analysts as important since the commission does not generally comment on monetary policy, which officially falls under the domain of the People’s Bank of China.  Some analysts feel the statement signals a possible rift among Chinese policymakers, especially since it follows a front-page article in the government run People’s Daily newspaper quoting an “authoritative person” who warned of the dangers of too much stimulus to the economy.

Finally, “jobs” are a constant topic on the campaign trail this year.  The Republicans decry what they view as Obama’s dismal job-creation record, while Democrats counter with claims that jobs created during Obama’s term are actually stellar.  Here (below) is a chart of jobs created since the start of each recent President’s term, going back to Jimmy Carter.  Both sides can take some comfort: Obama comes in well below Clinton and Reagan, but better than George W. Bush (who was saddled with both the 2000-2002 recession and the 2007 employment turndown). 

One thing missing in this (and most) analyses is a good scale of comparison.  Since the population was much lower 20 and 30 years ago, it is reasonable to conjecture each million new jobs would have a larger economic impact in prior years with lower populations.  Dividing the total jobs created by the starting population for each President reveals a slightly different scale of results than shown by the chart.  Jobs created per million of population were 69,726, 87,098, and 33,713 for Reagan, Clinton and Obama, respectively.  By that measurement, jobs created during Obama’s term have been less than half per million of population than his predecessors Reagan and Clinton, but much better than the 8,731 jobs created per million of population under George W. Bush.

 

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

The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market.  The average ranking of Defensive SHUT sectors fell to 14.8, down from the prior week’s 13.5, while the average ranking of Offensive DIME sectors fell to 18.3 from the prior week’s 16.8.  The Offensive DIME sectors remained lower in ranking than the Defensive SHUT sectors.  Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

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

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

Sincerely,

Dave Anthony, CFP®, RMA®

FBIAS™ for the week ending 7/29/2016

FBIAS™ for the week ending 7/29/2016

The very big picture:

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

Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best.   The CAPE is at 26.95, nearly unchanged from the prior week’s 26.96, after having earlier reached the level also reached at the pre-crash high in October, 2007.  Since 1881, the average annual return for all ten year periods that began with a CAPE around this level have been just 3%/yr (see graph below).

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

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate.  The U.S. Bull-Bear Indicator (see graph below) is in Cyclical Bull territory at 62.72, up from the prior week’s 60.39.

In the intermediate picture:

The Intermediate (weeks to months) Indicator (see graph below) turned positive on June 29th.  The indicator ended the week at 36 (the maximum value), unchanged from the prior week.  Separately, the Quarterly Trend 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 2016.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2 above), whether we are in a new Secular Bull or still in the Secular Bear, the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns.  The Bull-Bear Indicator (months to years) is positive (Fig. 3 above), indicating a potential uptrend in the longer timeframe.  The Quarterly Trend Indicator (months to quarters) is positive for Q3, and the Intermediate (weeks to months) timeframe (Fig. 4 above) is also positive.  Therefore, with all three indicators positive, the U.S. equity markets are rated as Very Positive.

In the markets:

The U.S. major indexes finished the week mixed.  The large cap indexes were flat to modestly lower, while the NASDAQ and smaller-cap indexes notched a fifth consecutive week of gains.  The Dow Jones Industrial Average declined 138 points to 18,432, down -0.75%, while the NASDAQ composite rose +1.22% to end the week at 5,162.  The LargeCap S&P 500 index was down fractionally, -0.07%, while MidCaps and SmallCaps rose +0.46% and +0.58% respectively.  The S&P MidCap 400 moved further into record territory, and is the best performer year to date.  The NASDAQ was the biggest gainer of the week, helped by strong earnings reports from Google (aka “Alphabet”) and Amazon.

In international markets, Canada’s TSX and the United Kingdom’s FTSE declined only slightly, down -0.12% and 0.09%, respectively.  On Europe’s mainland, France’s CAC 40 rose +1.34% and Germany’s DAX was even stronger at +1.87%.  Asian markets were down across the board, but not greatly.  China’s Shanghai stock exchange was off -1.11%, Hong Kong’s Hang Seng index fell -0.33%, and Japan’s Nikkei declined -0.35%.

In commodities, precious metals regained some luster as Gold rose +$34.50 an ounce to $1,357.90, up +2.61%.  Silver joined gold in the plus column, rising +$0.66 to $20.35, up +3.34%.  Oil, though, had a difficult week, declining -$2.59 to $41.60 for a barrel of West Texas Intermediate crude oil, down -5.86%.

July was a very good month for all major markets domestically and foreign.  Oil was among the very few minuses, losing -14.38% for the month.  The NASDAQ Composite led the parade of US gainers at +6.60%, followed by the SmallCap Russell 2000 at +5.90%.  The LargeCap S&P 500 was no slouch, at +3.56%, likewise the Dow at +3.68%.  Developed International markets as a group gained +3.98% (EFA), behind Emerging International’s very good +5.38% (EEM).

In U.S. economic news, the number of Americans filing for unemployment benefits rose slightly to a seasonally-adjusted 266,000 last week, according to the Labor Department.  Economists had forecast a rise of 260,000.  Claims have remained below 300,000, the threshold associated with a healthy labor market, for 73 consecutive weeks.  The smoothed 4-week average of claims, considered a better measure as it irons out week-to-week volatility, fell 1,000 to 265,500—the lowest level since April.

The Case-Shiller National Home Price index for May declined to 5.2% from 5.4%, missing consensus forecasts by 0.1%.  On an annual basis, home prices remained at a +5% rate of growth.  Analysts suggest that low long-term interest rates will continue to support the housing market, but there is some evidence that prices may be reaching levels that average homebuyers will find out of reach.  Portland continued to see the biggest annual increase, up +12.5%.  Seattle and Denver rounded out the top three, up +10.7% and +9.5%, respectively.  David Blitzer, managing director of the index committee at S&P Dow Jones Indices, noted that regional patterns are shifting.  The Pacific Northwest is now booming, and has overtaken the previously strongest areas of Los Angeles, San Diego and San Francisco.

New-home sales rose to a seven year high, signaling continued robust demand in the housing market.  June new-home sales rose by +3.5% to a seasonally adjusted annual rate of 592,000, according to the Commerce Department.  It was the strongest reading since February 2008 and beat forecasts by 32,000.  The median price jumped to $306,700 last month, 6% higher than this time last year.  Supply fell to a 4.9 month supply of homes at the current sales pace.  Lawrence Yun, the chief economist of the National Association of Realtors, warned than an inadequate supply of homes for sale is frustrating prospective buyers.  Regionally, sales weakened slightly in the Northeast and South, but surged by more than +10% in the West and Midwest. 

The Conference Board reported that consumer confidence was little changed this month, coming in at 97.3, down 0.1 point.  Economists had expected the index to fall further, to 95.5.  Lynn Franco, director of economic indicators at the Conference Board stated “consumers were slightly more positive about current business and labor market conditions, suggesting the economy will continue to expand at a moderate pace.”

Like the Conference Board report, consumers’ attitudes weakened slightly according to the University of Michigan’s Consumer Sentiment survey.  The index hit 90, slightly lower than expectations and down 3.5 from June’s final reading.  The monthly survey of 500 consumers measures attitudes toward topics like personal finances, inflation, unemployment, government policies and interest rates.  Richard Curtin, the survey’s chief economist, cited increasing concern among upper income households about economic prospects and lingering worries about Britain’s decision to leave the European Union. 

Activity in the U.S. service sector declined slightly, according to an early read of the services portion of July’s Purchasing Managers Index (PMI) of 50.9, down -0.5 from June.  Expectations had been for a reading of 51.2.  While the services sector rose at a weaker pace, the composite services + manufacturing index improved to 51.5, up +0.3 point, indicating a modest pickup in the rate of output growth. 

Durable goods orders fell -4% in June, the steepest drop in almost 2 years and the second straight month of negative readings.  Analysts had expected a -1.7% decline.  Durable goods are those which are expected to last 3 years or longer and serve as a good barometer for large capital expenditures and therefore the overall health of the U.S. economy.  Even after removing the volatile transportation component, durable goods orders still fell 0.5%.

U.S. GDP grew at a disappointing 1.2% annualized rate in the second quarter, according to the Commerce Department—far below economists’ expectations.  Economic growth is now tracking at a 1% rate of growth in 2016, the weakest since 2011.  Since the end of the recession, the average annual growth rate has been 2.1%, the weakest pace of any expansion since 1949.  Gregory Daco, economist at Oxford Economics stated “Consumer spending growth was the sole element of good news…weakness in business investment is an important and lingering growth constraint.”  Business investment fell -2.2%, its third consecutive quarterly decline. 

On Wednesday, the Federal Reserve left interest rates on hold as expected, but did state that a September Fed Funds rate increase could still be on the table.  According to the statement, near-term economic risks to the economy have diminished and the committee will continue to closely monitor inflation indicators and global and economic developments.  “Information received since the Fed policy committee in June indicates that the labor market strengthened and that economic activity has been expanding at a moderate rate,” the Fed reported.  Kansas City Fed President Esther George, who was in favor of an immediate rate hike, was the lone dissenter.

In international economic news, Canada’s GDP shrank by -0.6% in May, the worst monthly GDP figure since March 2009.  Wildfires in Alberta and a slowdown in manufacturing contributed to the decline, according to Statistics Canada.  Non-conventional oil and gas extraction declined by -22% due to the Fort McMurray fires.  Output from the western oilsands fields is now at its lowest level since May 2011.

In the United Kingdom, government bond yields fell to new lows as expectations increased that the Bank of England will cut interest rates at its monetary policy meeting on August 4 and possibly restart quantitative easing.  On Friday, the yield on the benchmark 10-year U.K. government bond was 0.74% while the 10-year note in the U.S. is about double that, at 1.45%.

European Union bank stocks rose at the end of the week in anticipation of the forthcoming results from stress tests for 51 lenders across the European Union.  The European Banking Authority will publish the results this weekend.  Across the Eurozone, second quarter GDP slowed to 1.2%, down -1% according to EU statistics agency Eurostat.  However, the pace of growth was 0.3% higher when compared to the first quarter.

French economic growth unexpectedly ground to a halt, recording no growth in the second quarter according to Insee, the French national statistics agency.  Finance Minister Michel Sapin understatedly said “second-quarter growth is disappointing given the forecasts.”  French household spending recorded no growth in the second quarter and investing fell 0.4%. 

The German DAX was the latest index to recoup all of its losses since the Brexit vote.  German unemployment continued to decline—an indication that Europe’s largest economy is showing resilience despite the Brexit vote.  The number of people out of work declined 7,000 to 2.682 million according to the Federal Labor Agency in Nuremburg.  The jobless rate remained at a record low 4.2%.

In Japan, all eyes were on the Bank of Japan, but the results were less than anticipated.  The BOJ decided to ease its monetary policy by expanding its purchases of securities, increasing its purchases to 6 trillion yen from 3.3 trillion per year.  Interest rates and its monetary base were unchanged.

Finally, mutual fund giant Vanguard recently released a report entitled The Global Case for Strategic Asset Allocation and an Examination of Home Bias.  Home bias is the tendency of a nation’s investors to invest the majority of their assets in their own nation’s equities regardless of how much or how little their own home nation represents as a % of total global assets.  In the report, summarized in the chart below, Vanguard notes that U.S. stocks make up 50.9% of global market capitalization, but U.S. investors have an average of 79.1% of their equity holdings in American stocks – an apparent “overweighting” of American equities relative to the rest of the world.  But Americans are nowhere near the most imbalanced.  Canadians, for example, are much more imbalanced, having over 59% of their assets invested in Canada while Canada comprises only 3.4% of global market cap, and Australians are the worst by this measure, having over 66.5% of their assets invested in Australia, which is only 2.4% of global market cap!

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

The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market.  The average ranking of Defensive SHUT sectors rose to 13.5, up from the prior week’s 14, while the average ranking of Offensive DIME sectors fell to 16.8 from the prior week’s 12.8.  The Offensive DIME sectors have lost their lead over the Defensive SHUT sectors.  Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

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

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

Sincerely,

Dave Anthony, CFP®, RMA®

FBIAS™ for the week ending 7/22/2016

FBIAS™ for the week ending 7/22/2016

The very big picture:

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

Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best.   The CAPE is at 26.96, nearly unchanged from the prior week’s 26.90, after having earlier reached the level also reached at the pre-crash high in October, 2007.  Since 1881, the average annual return for all ten year periods that began with a CAPE around this level have been just 3%/yr (see graph below).

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

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate.  The U.S. Bull-Bear Indicator (see graph below) is in Cyclical Bull territory at 60.39, up from the prior week’s 57.97.

In the intermediate picture:

The Intermediate (weeks to months) Indicator (see graph below) turned positive on June 29th.  The indicator ended the week at 36 (the maximum value), up from the prior week’s 34.  Separately, the Quarterly Trend 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 2016.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2 above), whether we are in a new Secular Bull or still in the Secular Bear, the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns.  The Bull-Bear Indicator (months to years) is positive (Fig. 3 above), indicating a potential uptrend in the longer timeframe.  The Quarterly Trend Indicator (months to quarters) is positive for Q3, and the Intermediate (weeks to months) timeframe (Fig. 4 above) is also positive.  Therefore, with all three indicators positive, the U.S. equity markets are rated as Very Positive.

In the markets:

Stocks managed a fourth straight week of gains, allowing the S&P 500 LargeCap and the S&P 400 MidCap indexes to claim new record highs.  The technology-heavy NASDAQ rallied over 70 points on strong earnings reports from Microsoft and semiconductor firm ASML Holdings.  For the week, the Dow Jones Industrial Average gained an additional +54 points to close at 18,570, up +0.29%.  All of the major U.S. indices were up as the LargeCap S&P 500 rose +0.61%, the MidCap S&P 400 gained +0.56%, and the SmallCap Russell 2000 added +0.63%.  The best-performing U.S. index, the NASDAQ Composite, surged +70 points and closed at 5,100, up +1.4%.  Interestingly, defensive plays such as Utilities stocks continue to rally with the broad market—the Dow Jones Utility Average gained 1.45% last week as well.

In commodities, precious metals lost their luster, experiencing a second week of losses.  Gold fell -$14.30 to $1323.40 an ounce, down -1.07%.  Silver, likewise, fell -$0.61 to $19.69 an ounce.  Crude oil fell over -4.5% to $44.19 a barrel for West Texas Intermediate.  Commodities as a group continue to be pressured, as the Commodity Research Bureau (CRB) Index fell -3.16% last week.

In international markets, almost all major international markets recorded gains last week.  Canada’s TSX shrugged off weakness in the energy sector and rose +0.82%.  The United Kingdom’s FTSE appears to be ignoring economists’ prophecies of economic doom following the Brexit vote, and rallied +0.92% – its fifth straight week of gains.  On mainland Europe, Germany’s DAX gained +0.8%, France’s CAC 40 rose +0.2%, and Italy’s FTSE MIB index added +0.18%.  Markets were mixed in Asia, where China’s Shanghai Composite fell -1.34%, Hong Kong’s Hang Seng index rose +1.41%, and Japan’s Nikkei gained +0.78%.

In U.S. economic news, applications for unemployment benefits fell by 1,000 to 253,000 as jobless claims remained below the 300,000-level for the 72nd consecutive week.  Forecasts had called for a seasonally-adjusted 260,000 initial jobless claims last week.  Claims have now remained below 300,000, a key benchmark, for the longest streak since 1973.  The 4-week average of new jobless claims, smoothed to reduce volatility, declined by 1,250 to 257,750 according to the Labor Department.  Continuing jobless claims, which counts those already receiving benefits, declined by 25,000 to 2.13 million in the week ended July 9th. 

Sentiment among U.S. home-builders diminished in July, according to the National Association of Home Builders (NAHB) index which fell 1 point to 59 after 4 months of unchanged readings.  Economists had expected the index to remain at 60.  All 3 of the indexes sub-gauges declined.  The index of current conditions fell 1 point to 63, the gauge for the upcoming 6 months gave up 3 points to 66, and buyer traffic declined by 1 to 45.  Readings over 50 signal improvement.  Builder confidence peaked at a 10-year high last fall, but has remained in a relatively narrow range since.  Builders continue to report difficulty finding lots and labor according to a statement released by the NAHB.

Housing starts jumped +4.8%to a seasonally-adjusted annual pace of 1.19 million last month as supply still lagged demand, according to the Commerce Department.  Economists had forecast a 1.17 million pace.  Permits, which serve as an indicator of future demand, rose +1.5% to an annualized 1.15 million.  For the second quarter, starts are averaging a 1.16 million annual rate, up slightly from the first quarter.  Single-family starts, viewed as an indicator of the health of the housing market, jumped +4.4% last month to an annualized rate of 778,000, however starts are down -3.6% in the 2nd quarter compared to the 1st quarter.  Builders have been reluctant to step up construction to pre-recession levels, likely due to the traumatic experience of the housing bust.  According to the NAHB, half of all housing lots were priced at or above $45,000, the highest median housing lot value ever—surpassing the median $43,000 set in 2006 when single-family starts were double their number now.

Sales of previously owned homes rose last month to a fresh new high, evidence that the existing-home market continues to be on firm footing.  Existing-home sales rose 1.1% to a seasonally adjusted annual rate of 5.57 million in June, according to the National Association of Realtors.  Home sales are 3% higher than this time last year and are the strongest since February of 2007.  Economists had expected a lower rate of 5.47 million.  First-time buyers comprised 33% of all purchases, the highest percentage in 4 years.  Investor purchases declined to 11%, the lowest since July 2009.  Supply is 5.8% lower than it was a year ago, the 13th consecutive month of yearly declines, once again driving up prices and making many houses unaffordable.  Trulia’s Chief Economist Ralph McLaughlin reported that at the current sales pace, there is only a 4.3 month supply of homes on the market—the lowest since 2005.  In June, the median home price was $247,700, up +4.8% from a year ago.

Manufacturing continues to be under pressure, according to the Philadelphia Fed’s regional manufacturing index which fell into contraction with a -2.9 reading this month, down from positive 4.7 last month.  This is the 9th month of declining activity in the past 11 months and the slowest pace in half a year.  Economists had expected a positive 3.5.  This follows the weakness in the New York Fed’s regional manufacturing index, known as the Empire State index, which was down to a barely positive 0.6.  However, some of the key details were positive.  The new orders index, viewed as a proxy of future business activity, rose to 11.8 up from -3 last month.  Shipments also increased to 6.3 from -2.1.  Furthermore, more manufacturers in the Philadelphia region expect business to be better 6 months from now, according to the future general activity index which rose 4 points to 33.7.

Markit’s flash manufacturing Purchasing Managers Index (PMI) index rose to a 9-month high of 52.9 from 51.3, as production and employment strengthened.  Domestic demand remained the main driver of growth where new orders rose to a 9-month high according to Markit.  Exports also increased in June, but at a slower rate than domestic orders.  Manufacturers are benefiting from U.S. consumers as solid housing and automotive markets drive consumer spending on manufactured goods.  Factories grew payrolls by the most in 12 months due to the increased activity.  Chris Williamson, Markit’s chief economist, wrote that “July saw manufacturers battle against a strong dollar, the ongoing energy sector downturn and political uncertainty ahead of the presidential election, yet still achieved the best growth seen since last year.”

In international economic news, Canadian government bonds dropped sharply Friday after higher than expected readings in consumer inflation data and retail sales.  Canada’s consumer price index rose +0.2% month over month in June, beating forecasts by 0.1%.  Core CPI rose +2.1%.  Retail sales jumped +0.2% month over month, exceeding expectations of a flat reading.

In the United Kingdom, data firm Markit reported that private sector activity in the U.K. fell to its lowest level since 2009.  The firm’s Purchasing Managers Index (PMI) fell into contraction (sub-50) at 47.7, down from 52.4 in June.  It was the biggest one month fall on record for the index and was noted as a “dramatic deterioration” attributed to the June 23rd “Brexit” vote.  A flash reading on the manufacturing sector dropped to 49.1 from 52.1 in June, as well.

For the Eurozone overall, the flash PMI reading for the services sector was 52.7, down 0.1 point from June.  Manufacturing dipped to 51.9 vs. 52.8 the previous month.  Business activity settled to an 18-month low and indicates a 1.5% annual growth rate, according to Markit.  Breaking out individual countries, Germany’s flash services reading was 54.6, up 0.9 from June, while manufacturing fell 0.8 point to 53.7.  In France, there was a rebound in services to 50.3, up 0.4 point and back into expansion, while manufacturing remained in contraction at 48.6.

In Japan, the BBC reported that Bank of Japan Governor Kuroda said that he has ruled out the idea of using “helicopter money” to combat deflation.  “Helicopter money” is a euphemism based on American economist Milton Friedman’s suggestion that central banks could spur an economy simply by printing money and distributing it to consumers by throwing it from helicopters.   Kuroda believes that the Bank of Japan has the tools in place to revive the economy and spur inflation if needed.

In China, recent economic data suggests that there is little evidence that China has been implementing structural reforms to overhaul its economy, but instead is continuing down the path of credit-fueled growth.  Second quarter gross domestic product growth came in at 6.7%, matching forecasts.  China reported that industrial production and retail sales growth beat expectations last month.  However, fixed asset investment cooled more than expected for the first half of the year.

Finally, as noted above, last week’s unemployment claims came in lower than expected at 253,000, well below the widely-cited benchmark of 300,000.  The reading was the second lowest in the 7 years since the economy bottomed in early 2009.  Claims have now remained below 300,000 for 72 weeks – the longest stretch of sub-300,000 readings since 1973.  Initial claims for unemployment is considered by some analysts as one of the more useful indicators for anticipating future economic expansion or recession, and at this point the number shows no signs of breaching the 300,000 level any time soon.

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

The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market.  The average ranking of Defensive SHUT sectors fell to 14, down from the prior week’s 9.8, while the average ranking of Offensive DIME sectors rose to 12.8 from the prior week’s 13.8.  The Offensive DIME sectors have taken the lead over Defensive SHUT.  Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

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

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

Sincerely,

Dave Anthony, CFP®, RMA®