FBIAS Market update for the week ending 6/23/2017

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 Fig. 1 for the 100-year view of Secular Bulls and Bears.

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Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best. The CAPE is at 25.35, down from the prior week’s 25.88, after having earlier reached the level also reached at the pre-crash high in October, 2007. Since 1881, the average annual return for all ten year periods that began with a CAPE around this level have been just 3%/yr (see Fig. 2).

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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 Fig. 3) turned negative on January 15th, and remains in Cyclical Bear territory at 50.56, down from the prior week’s 52.03.

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In the intermediate picture:

The intermediate (weeks to months) indicator (see Fig. 4) turned negative on May 12th. The indicator ended the week at 28, down from the prior week’s 29. Separately, the quarter-by-quarter indicator – based on domestic and international stock trend status at the start of each quarter – gave a positive indication on the first day of April for the prospects for the second quarter of 2016.

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Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), whether we are in a new Secular Bull or still in the Secular Bear, the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns. The Bull-Bear Indicator (months to years) is negative (Fig. 3), indicating a new Cyclical Bear may have arrived. The Quarterly Trend Indicator (months to quarters) is positive for Q2, and the Intermediate (weeks to months) timeframe (Fig. 4) is negative. Therefore, with two of the three indicators negative, the U.S. equity markets are rated as Mostly Negative.

In the markets:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

clip_image002But one with an even better statistical correlation to future returns (an “r-squared” of 0.91, for you geeks), does not use market valuation at all! Rather, it is based on the percentage of all household financial assets that are invested in the stock market. The higher the percentage, the lower future returns. Currently, households are at the high end of the historical range, at 52% vs the long-term median of 44%. This level portends future 10-year annualized returns of slightly less than 4%, joining the late 60’s, 2000 and 2007 as years with similar readings.

(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, stocksandnews.com, marketwatch.com, wantchinatimes.com, BBC, 361capital.com, pensionpartners.com, cnbc.com, FactSet; Figs 1-5 source W E Sherman & Co, LLC)

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The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market. The average ranking of Defensive SHUT sectors fell to 12,5, down from the prior week’s 10.8, while the average ranking of Offensive DIME sectors rose to 10.8 from the prior week’s 11.8. The Offensive DIME sectors now lead the Defensive DIME sectors by a small margin. Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

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

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

Sincerely,

Dave Anthony, CFP®

 

 

FBIAS™ market update for the week ending 11/25/2016

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 Fig. 1 for the 100-year view of Secular Bulls and Bears.

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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 27.40, up from the prior week’s 27.01, 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 Fig. 2).

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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 Fig. 3) is in Cyclical Bull territory at 57.72, up from the prior week’s 55.40.

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In the intermediate picture:

The Intermediate (weeks to months) Indicator (see Fig. 4) turned positive on November 10th. The indicator ended the week at 29, up from the prior week’s 27. Separately, the Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was positive entering October, indicating positive prospects for equities in the fourth quarter of 2016.

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Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), 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), indicating a potential uptrend in the longer timeframe. The Quarterly Trend Indicator (months to quarters) is positive for Q4, and the Intermediate (weeks to months) timeframe (Fig. 4) is positive. Therefore, with all three indicators positive, the U.S. equity markets are rated as Very Positive.

In the markets:

This week, the Dow Jones Industrial Average, NASDAQ, and Russell 2000 all hit all-time highs together for the first time since 1999. Major indexes were strong both at home and around the world. The Dow Jones Industrial Average gained +284 points to close at 19,152, up +1.5%. The tech-heavy NASDAQ Composite rose +77 points to end the week at 5398, up +1.45%. Smaller market caps outperformed large caps for the third consecutive week, as the MidCap S&P 400 index rose +2.17% and the SmallCap Russell 2000 added +2.4%, while the LargeCap S&P 500 gained +1.44%. Of note, both the Dow Jones Transports and Utilities indexes had strong weeks. The defensive Utilities sector joined the fun after having been beaten down since the election, gaining +2%.

Canada’s TSX rose a third straight week, up +1.4%. Across the Atlantic, the United Kingdom’s FTSE also had its third week of gains, up +0.96%. On Europe’s mainland, France’s CAC 40 rose +1%, while Germany’s DAX gained a third of a percent. Italy’s Milan FTSE added +1.5%. Major Asian markets were strong across the board. China’s Shanghai Composite rose +2.16%, Japan’s Nikkei surged +2.3%, and Hong Kong’s Hang Seng index gained +1.7%. Overall, emerging markets as a group (as measured by the MSCI Emerging Markets Index) edged developed markets as a group (as measured by the MSCI Developed Markets Index), with emerging markets rising +1.9%, while developed gained +1.1%.

In commodities, oil plunged almost -4% on Friday, but for the week managed to end down only -0.65%. Precious metals had a third consecutive down week as Gold fell -2.5% to close at $1,178.40 an ounce while Silver dropped ‑0.93% to $16.47. The industrial metal copper, an indicator of global economic activity, had a big week by surging over +8%

In U.S. economic news, the number of Americans who applied for new unemployment benefits rose by 18,000 to 251,000, according to the Labor Department. The increase comes one week after initial claims fell to a 43-year low. Economists had forecast initial claims to rise to a seasonally adjusted 248,000. Most of the increase appears to have come from Illinois and California. Initial claims have remained below the key 300,000 threshold for 90 straight weeks, the longest streak since 1970. The economy has been adding about 180,000 new jobs a month this year, and the unemployment rate remains at a low 4.9%.

Existing home sales soared to almost a 10-year high last month, further evidence of the strong demand supporting the housing market. According to the National Association of Realtors, existing home sales ran at a seasonally adjusted annual rate of 5.6 million, an increase of +2% from September and +5.9% higher than a year ago. Forecasts had been for only a gain of 5.4 million. It was the fastest rate of sales since February of 2007. All four regions of the country recorded gains. In addition, it was the 17th straight month of yearly inventory declines with 4.3% fewer homes on the market than in October of last year. With inventory shrinking, it’s no surprise that the median sale price ratcheted up to $232,200, +6% higher than last year.

In contrast to existing home sales, new single-family home sales actually fell -1.9% to 563,000 in October according to the Commerce Department. The number missed economists’ expectations of 595,000. Nevertheless, October’s sales were +17.8% higher than October of 2015, and year to date sales in 2016 are +12.6% higher than this time last year. The median sales price last month was $304,500, versus $298,700 a year ago. At the current sales rate, it would take 5.2 months to exhaust the supply of homes on the market. Strong demand for housing with the corresponding lean supply has been keeping prices relatively high. Home builders are just now starting to ramp up construction of new homes to a level that analysts believe will sustain a healthier housing market.

Sentiment among American consumers rose sharply following Donald Trump’s election, with many Americans expressing greater optimism now that the election is over according to the University of Michigan’s consumer sentiment survey. The monthly survey of 500 consumers measures attitudes toward topics like personal finances, inflation, unemployment, government policies and interest rates. The survey climbed to 93.8 last month, up a rather large move of +6.6 points to the highest level since early summer. Richard Curtin, chief economist of the U of M survey wrote, “The post-election boost in optimism was widespread, with gains recorded among all income and age subgroups and across all regions of the country.” However, he points out, “presidential honeymoons” can end quickly and consumers’ confidence in the economy can wane if the new administration doesn’t take quick action to improve the economy.

A gauge of manufacturing in the Midwest is running below its potential, according to analysts. The Chicago Fed’s national activity index rose +0.15 point to -0.08 last month as consumer spending, housing spending, factory production, and business orders all showed improvement. The Chicago Fed index is a weighted average of 85 different economic indicators, designed to have an average value of 0, so that a positive reading indicates growth above trend and negative readings correspond to growth below trend. As with other volatile data sets, analysts use a 3-month moving average to discern a clearer picture of the trend in economic activity and in this case it weakened to a -0.27. Bernard Yaros, economist with Moody’s stated that the weaker 3-month average is “indicating inflationary pressure from U.S. economic activity will be limited.”

Orders for long-lasting goods, known as durable goods, surged +4.8% last month, according to the Commerce Department. The increase is the fourth in a row and beat economists’ forecasts of a +3.3% gain. Behind the impressive result, was a +94.1% spike in new orders for passenger planes. Aircraft orders often swing sharply from month-to-month and their effects can wildly skew trends in durable goods data. Demand for autos fell ‑0.6%. Ex-aircraft and auto industries, orders for durable goods increased a much less impressive +1% last month. Joshua Shapiro, chief economist at MFR Inc. stated “The underlying details in the report were lackluster in October.” Core capital goods orders, a key measure of business investment, rose an anemic +0.4% following a drop in September. Although these orders have recovered slightly, they are 4% lower than this time a year ago.

Growth in the service sector reached its second highest level in 12 months according to Markit’s flash November Purchasing Managers’ Index (PMI). The service sector PMI came in at 54.7, down -0.1 from October. In the survey, respondents commented on “stronger demand from both businesses and consumers in November, helped by the improving economic backdrop.” In the details of the report, new business growth rose to the strongest pace since last November. Backlogs fell, but that was due in part to stronger hiring. Survey respondents were optimistic on growth prospects over the coming year. Markit reported that growth is continuing to accelerate as the year comes to an end.

Minutes of the most recent Federal Reserve meeting show senior Fed officials agreed that it may finally be appropriate to raise interest rates “relatively soon”, given the environment of an improving labor market and somewhat higher inflation. Minutes from a two-day session in early November, show that “most participants expressed a view that it could well become appropriate to raise the target range for the federal-funds rate relatively soon.” Noteworthy in the latest minutes is concern among several officials that the U.S. economy could be at risk if the central bank waits too long to raise rates, a marked change from just a few months ago. The Federal Reserve will reconvene in December where an increase in key interest rates is seen as essentially guaranteed. Financial markets see a 93.5% chance the central bank will raise its benchmark short-term interest rate range by a quarter point to 0.5%-0.75%, according to the Chicago Mercantile Exchange’s FedWatch Tool.

Canada’s Environment Minister Catherine McKenna announced that Canada will shutter all of its coal-fired power plants by 2030 as part of its strategy to cut greenhouse gas emission under the Paris climate accord. The plants, located in four provinces, produce an estimated 10% of Canada’s total CO2 emissions. Closing them will remove the equivalent of 1.3 million cars from Canada’s roads (roughly 5 megatons of greenhouse gas emissions), she announced. “As part of our government’s vision for a clean growth economy, we will be accelerating the transition from traditional coal power to clean energy by 2030,” she said. With an abundance of hydroelectric power, as well as nuclear, solar and wind power, 80 percent of Canada’s electricity production emits no air pollution.

In the United Kingdom, the global think-tank Organization for Economic Cooperation and Development (OECD) said that Britain’s economy is growing faster than the rest of the G7 – another sign that most of the fears surrounding the Brexit vote were (so far) unfounded. The UK grew by +2.3% in the third quarter of 2016, outpacing all other countries in the group. The average third-quarter growth rate of G7 economies was +1.4%. The robust economic growth comes after strong employment numbers, lower than expected inflation, and surging retail figures.

In France, Former French President Nicolas Sarkozy’s political career is essentially over after a humiliating defeat by his former Prime Minister Francois Fillon in the first round of the race to choose the Republican party’s candidate for the presidency next spring. Fillon, a social conservative and free-market reformer, came close to winning the nomination getting 43% of the vote. He now faces a runoff vote against a more moderate Alain Juppe. Mr. Juppe is the mayor of Bordeaux and former prime minister under Jacques Chirac. Sarkozy had come under fire following several legal investigations into corrupt campaign financing.

In Germany, Bavarian economic minister Ilse Aigner said that Germany needs a “comprehensive” new EU trade deal with the UK following the Brexit vote, in order to minimize the potential fallout for its own economy. She argued that Brexit poses a “high risk” to the German economy and that the UK is “one of the most important trading partners for Bavaria”, one of Germany’s most prosperous states. Britain’s leaders have been optimistic that Germany will help temper France’s call for Britain to pay a tough economic price for its decision to leave the EU.

Italian voters will head to the polls on December 4th in a referendum on constitutional reforms that will have far-reaching consequences for the country – and for the euro. If Italian leader Matteo Renzi loses the vote, it’s believed that the anti-euro 5-star Movement could take over as ruling party and reject the country’s debts. Market risk assigned to Italian government debt has consequently surged in recent weeks. European Central Bank vice-president Vitor Constancio said he is closely watching the outcome of Italy’s vote amid concerns that the outcome could impact stability in the whole of the European Union.

In Asia, refusal by the U.S., European Union, and others to recognize China as a market economy is the latest sign of friction in the trade between the Asian economic giant and other world powers. Penny Pritzker, U.S. Secretary of Commerce, said that the time “was not ripe” to grant China market-economy status under World Trade Organization rules. China’s status therefore remains a “non-market economy” under the treaty, meaning that Chinese products such as steel can be saddled with steep tariffs if it is determined that the country is “dumping” those goods. Recognition as a market economy would force trading partners to use domestic Chinese prices as a baseline for judgements about export prices, limiting their ability to impose restrictions. For many goods, prices are far lower in China than their international prices.

Japanese consumer prices fell last month extending the streak to the longest in 5 years, government data showed. Japan has been struggling to reverse a deflationary spiral of falling prices and tepid growth. October’s reading marked the 8th straight month of price declines, the longest since 2011. Bank of Japan governor Haruhiko Kuroda blamed weak crude oil prices. Yasunari Ueno, chief market economist at Mizuho Securities said he believed that “prices will turn into positive territory eventually, but so far upward movement of prices…is still weak.” In addition he stated that the reason behind the slow pace of price rises is because the economic recovery is very slow.

Finally, television executives and advertisers are concerned over a disturbing new trend: young people are turning off sports, crime dramas and – most especially – news at an alarming rate. On the other hand, comedy was enjoyed by 18-24 year olds much more than by older cohorts. Viewers between the ages of 18 and 24 were the least interested in news as a genre, according to a survey of 31,000 people across 10 countries carried out by research firm Ampere Analysis. The trend was most pronounced in the United Kingdom and United States.

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(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, FactSet; Figs 1-5 source W E Sherman & Co, LLC)

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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 23.00 from 23.50, while the average ranking of Offensive DIME sectors was unchanged at 11.25. The Offensive DIME sectors continue to lead Defensive SHUT sectors. Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

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

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

Sincerely,

Dave Anthony, CFP®

FBIAS™ market update for the week ending 11/18/2016

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 Fig. 1 for the 100-year view of Secular Bulls and Bears.

image

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 27.01, up modestly from the prior week’s 26.80, 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 Fig. 2).

image

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 Fig. 3) is in Cyclical Bull territory at 55.40, up from the prior week’s 53.47.

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In the intermediate picture:

The Intermediate (weeks to months) Indicator (see Fig. 4) turned positive on November 10th. The indicator ended the week at 27, up sharply from the prior week’s 19. Separately, the Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was positive entering October, indicating positive prospects for equities in the fourth quarter of 2016.

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Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), 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), indicating a potential uptrend in the longer timeframe. The Quarterly Trend Indicator (months to quarters) is positive for Q4, and the Intermediate (weeks to months) timeframe (Fig. 4) is positive. Therefore, with all three indicators positive, the U.S. equity markets are rated as Very Positive.

In the markets:

Stocks added to the strong post-election rally, pushing many of the major benchmarks to new all-time highs. The smaller-cap indexes, typically more volatile, performed the best. The Dow Jones Industrial Average rose +20 points to 18,867, up +0.11%, while the tech-heavy NASDAQ Composite rallied +1.6% to 5,321. The LargeCap S&P 500 added +0.8%, but was sharply outpaced by its Small- and Mid- brethren: the MidCap S&P 400 index surged +2.75% and the Russell 2000 SmallCap index gained +2.59%.

In international markets, Canada’s TSX rose +2.12%, a second week of gains. Across the Atlantic, the United Kingdom’s FTSE recovered a bit more from early November’s plunge adding +0.67%. On Europe’s mainland, France’s CAC40 gained +0.34%, Germany’s DAX ended nearly flat, down just -0.03%, and Italy’s Milan FTSE fell ‑3.25%. In Asia, China’s Shanghai Stock Exchange was flat-to-down at -0.1%. Japan’s Nikkei surged a very handsome +3.4%, possibly due to views that President-elect Trump’s economic policies may benefit Japan—more on that below.

In commodities, precious metals had a second difficult week as Gold fell another $15.60 an ounce to $1208.70, down -1.27%. Silver plunged even further down -4.36%. Precious metals typically respond negatively to a rising dollar, and that has been the situation of late – in spades – as the dollar has ripped higher since the election all the way to a 14-year high. The industrial metal copper gave back some of last week’s gains by falling -1.65%. Crude oil rebounded following 3 weeks of losses, rising $2.95 a barrel to end the week at $46.36, a weekly gain of +6.8%.

In U.S. economic news, jobless claims are at a 43-year low as the number of people who applied for unemployment benefits last week fell by 19,000 to 235,000. Initial claims have now remained under the key 300,000 threshold level for 89 straight weeks, the longest stretch since 1970. The U.S. unemployment rate also remains near an 8 year low of 4.9%. Continuing jobless claims, the number of people already receiving unemployment benefits, also decreased by 66,000 to 1.98 million – the first time that number has been below 2 million since mid-2000.

Sentiment among home builders remained unchanged in November, according to the National Association of Home Builders’ (NAHB) index. The latest reading of 63 matched the median forecast among economists. Current sales conditions and sales expectations were at 69, while the index of buyer traffic rose a point to 47. Readings over 50 signal improving conditions. Robert Dietz, the home builder trade group’s chief economist, said in a statement “Ongoing job creation, rising incomes and attractive mortgage rates are supporting demand in the single-family housing sector. This will help keep housing on a steady, upward glide path in the months ahead.”

Construction of new houses jumped 26% last month to the highest level in 9 years, boosted by a spike in multi-family units. Housing starts climbed to an annual rate of 1.32 million from 1.05 million in September, according to the Commerce Department. Economists had expected only 1.17 million new starts. Higher prices and a shortage of properties for sale have encouraged builders to step up construction. New construction accelerated in all regions of the country, surging by more than +44% in the Northeast and Midwest. Construction of apartment buildings, condominiums, and multi-unit dwellings were up +75% last month. Single-family home starts rose almost +11%, the fastest pace since October, 2007. Future building activity also looks promising as permits are running about +5% above year-ago levels.

Retail sales surged for a second consecutive month for the best two-month performance since early 2014. October retail sales jumped +0.8% last month, following a +1% rise in September. Economists had forecast a +0.7% gain. With consumer spending a main driver of economic growth, the increase in retail sales suggests that the U.S. economy got off to a good start in the 4th quarter. Alan MacEachin, an economist at Navy Federal Credit Union, stated “A solid jobs market is driving up household incomes and boosting spending power.” A large portion of the gains were due to auto dealers where sales hit an 11-month high following strong incentive programs. Even ex-autos and gas, sales were still up a healthy +0.6%.

The New York Fed’s Empire State Index turned positive for the first time in four months following improvement in new orders and shipments. The Empire State Manufacturing sub-index rose back into expansion by rising +8.3 points to 1.5. New-orders surged +8.7 points to 3.1, and shipments jumped +9.1 points to 8.5. Inventory levels declined significantly, plunging -11.3 points to -23.6—a multiyear low.

Manufacturing in the mid-Atlantic region recorded slightly slower growth, according to the Philadelphia Fed’s manufacturing index. The index slowed slightly to 7.6, down -2.1 points from September. The index has remained above the 0 level, indicating improving conditions, for four consecutive months. Most sub-indexes remained positive with general activity, new orders, and shipments all recording strong results.

Inflation at the wholesale level remains low, coming in unchanged for October, but the reading follows several years of weaker prices. Higher costs for natural gas and gasoline were offset by declines in food and services. Taking a long-term view, over the past 12 months wholesale costs have risen +0.8%, the highest one-year change since the end of 2014. Stripping out the volatile food, energy, and trade margin categories yields the so-called core producer prices. That measure is rising at an even faster rate, up +1.6% over the past 12 months, the fastest in 2 years. If these trends continue, higher wholesale prices will eventually lead to higher prices for consumer goods and services.

Consumer inflation rose at the fastest rate in 6 months, according to the latest Consumer Price Index (CPI) reading. The Labor Department reported that the index rose +0.4% last month, after rising +0.3% in September. On an annualized basis, the CPI is up +1.6% – the biggest year-over-year increase since October of 2014. The increase was in line with economists’ forecasts. Core inflation, which strips out potentially volatile food and energy costs, climbed +0.1% last month. Annualized, core inflation is currently 2.1% – right in line with the Federal Reserve’s 2% inflation target. The firming inflation along with the labor market approaching full capacity leads many analysts to believe that the Federal Reserve will have the green light to raise interest rates at its December 13-14 policy meeting.

Industrial production—a measure of output from America’s factories, utility plants, and mines—was unchanged in October, said the Federal Reserve, as a sharp drop in utilities production was offset by modest gains in factory output. Economists had forecast a +0.2% gain. In the details of the report, manufacturing output rose +0.2% and mining output jumped by +2.1%, but utilities production plunged 2.6%. High Frequency Economics chief U.S. economist Jim O’Sullivan said in a note to clients “Through the volatility, the trend in manufacturing appears to be at least modestly positive, and the oil-drilling-led plunge in mining seems to have ended.” Capacity utilization, a gauge of slack in the industrial economy, ticked down 0.1 percentage point to 75.3% last month in line with expectations.

In international economic news, the Bank of Canada said it won’t necessarily move in lockstep with the Federal Reserve if the U.S. central bank hikes its key interest rate next month, a move which is widely expected. Deputy Governor Timothy stated “We are free to adjust our policy interest rate in the context of Canadian economic conditions—and in particular, we do not need to move in step with the Federal Reserve” in a speech in Waterloo, Ontario. Mr. Lane pointed out that Canadians will no doubt feel the reverberations from whatever the U.S. does. Higher U.S. interest rates will likely push the Canadian dollar lower, boost exports, and push up some Canadian rates. As a net importer of foreign capital, Canada’s economy is exposed to the “vagaries of global flows”, Mr. Lane acknowledged.

In France, Emmanuel Macron formally declared that he will seek the French presidency in next year’s election, ending months of speculation. The 38-year-old former economic minister and protégé of President Francois Hollande left his government post in August saying he wanted more freedom for his ideas to repair France’s ailing economy and growing social divisions. Macron created his own political movement known as “En Marche” roughly translated as “On the Move!” and remains a popular political figure. His platform offers voters a pro-EU platform, in contrast with the National Front party of Marine LePen, the current front-runner.

German economic growth slowed in the third quarter of the year, hampered by weaker exports. Europe’s largest economy grew by just +0.2%, half the rate of the second quarter and far below the first quarter’s +0.7% advance. Germany’s Federal Statistics Office stated “Exports were slightly down while imports were slightly up compared with the second quarter of 2016. Positive impulses on the quarter came mainly from domestic demand. Both household and state spending managed to increase further.” Some analysts stated that the uncertainty caused by Britain’s vote to leave the EU may have counteracted the country’s solid domestic activity. In addition, worries of a more protectionist U.S. economy added to fears. ING Bank economist Carsten Brzeski said, “If Germany’s single most important trading partner, the US, really moves towards more protectionism, this would definitely leave its mark on German growth.”

In Asia, the election of Donald Trump may have put China in the driver’s seat for a new trade deal in the Pacific Rim. A decade-old plan for a free-trade area in Asia is set to be resurrected at a meeting of Pacific Rim country leaders in Peru, as the region works on an alternative to the U.S.-led Trans-Pacific Partnership. Donald Trump had taken a strong anti-TPP stance during his campaign. Leaders are looking to resurrect the Free Trade Area of the Asia Pacific (FTAAP). Completion of the deal would hand Chinese President Xi Jinping the reins in a most important geopolitical shift.

In Japan, Goldman Sachs chief Asia Pacific economist Andrew Tilton released a note that a firmer U.S. dollar is positive for Japan, even as Donald Trump’s victory cast uncertainty over the Asian economic outlook. The dollar surged to a 14 year high against a basket of major currencies and U.S. debt yields hit nearly one-year highs on expectations that Trump’s policies will boost the U.S. economy. Tilton told the Reuters Global Investment Outlook Summit in Hong Kong, “More Fed tightening and a stronger dollar is probably good for Japan. Japan is a very low-inflation country that is trying to stimulate the economy… but can’t really lower rates feasibly much further. So if the U.S. can raise rates and raise the currency versus the yen, then yen can depreciate without Japan having to do anything else. For Japan, this is great news.”

Finally, treasury yields have soared following the surprising election of Donald Trump for President of the United States. Theories abound regarding the causes and consequences of the move, but as always it is good practice to step back and take a look at the big picture. Veteran technical analyst Louise Yamada, in a CNBC interview, looked at interest rates in the U.S. over the last 200 years and draws our attention to a few points. First, according to Ms. Yamada, is that interest rates are most likely to only go up from here. Yamada refers to an apparent “bottoming formation” that has been forming over the last several years. On the 10-year Treasury note, a move above 3% would confirm her assessment because that’s the “level at which we can definitively say that rates have reversed”, Yamada states. Yamada predicts that higher rates will boost equity prices in the near term, as in past cycles. However, she will be watching the roughly 5% level where “you’ll start having problems.” 10-year Treasury notes finished this past week at 2.34%, so we’re a long way away from her danger zone.

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(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, FactSet; Figs 1-5 source W E Sherman & Co, LLC)

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The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market. The average ranking of Defensive SHUT sectors fell slightly to 23.50 from 23.30 , while the average ranking of Offensive DIME sectors was unchanged at 11.25. The Offensive DIME sectors continue to lead Defensive SHUT sectors. Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

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

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

Sincerely,

Dave Anthony, CFP®

FBIAS™ market update for the week ending 11/11/2016

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 Fig. 1 for the 100-year view of Secular Bulls and Bears.

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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 26.80, up from the prior week’s 25.82, 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 Fig. 2).

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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 Fig. 3) is in Cyclical Bull territory at 53.47, up from the prior week’s 51.91.

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In the intermediate picture:

The Intermediate (weeks to months) Indicator (see Fig. 4) turned positive on November 10th. The indicator ended the week at 19, up from the prior week’s 14. Separately, the Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was positive entering October, indicating positive prospects for equities in the fourth quarter of 2016.

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Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), 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), indicating a potential uptrend in the longer timeframe. The Quarterly Trend Indicator (months to quarters) is positive for Q4, and the Intermediate (weeks to months) timeframe (Fig. 4) is positive. Therefore, with all three indicators positive, the U.S. equity markets are rated as Very Positive.

In the markets:

U.S. stocks enjoyed their best week since 2011 as investors reassessed future corporate earnings, overall economic growth, and inflation expectations following the surprise victory of Donald Trump in the U.S. presidential election. Although all major indexes recorded solid gains, small-cap equities smartly outperformed large caps. The blue chip Dow Jones Industrial Average reached a record high of 18,847 rallying +959 points to end the week up +5.36%. That impressive move was eclipsed by the +10.2% surge in the SmallCap Russell 2000. The MidCap S&P 400 also had a strong week, rallying almost +5.7%. The S&P 500 LargeCap index gained +3.8% while the tech heavy NASDAQ Composite brought up the rear with a gain of +3.78%.

Canada’s TSX gained a modest +0.32%, held down by lower gold and energy prices. Across the Atlantic, the United Kingdom’s FTSE added half a percent. On Europe’s mainland France’s CAC 40 rose +2.55% and Germany’s DAX gained +3.98%. In Asia, markets were mostly green with China’s Shanghai Composite rising +2.26% and Japan’s Nikkei gaining +2.78%, but Hong Kong’s Hang Seng fell half a percent. As a group, emerging markets (as measured by the MSCI Emerging Markets Index) fell -3.8%, hurt by rocketing interest rates on emerging market debt, while developed markets (as measured by the MSCI Developed Markets Index) gained +0.8%.

Commodities markets diverged sharply. In precious metals, Gold surrendered 4 weeks of gains, plunging over ‑$80 to $1,224.30 an ounce, a loss of -6.15%. Silver had a similar move, also plunging over -5.4% to $17.38 an ounce. The industrial metal copper, though, had a 3rd week of strong gains by surging over +10.7% last week. Weakness was also the theme in the energy markets, where a barrel of West Texas Intermediate crude oil fell ‑1.5% to $43.41 a barrel, a 3rd consecutive week of losses. The hoped-for OPEC production limit agreement has seemingly fallen apart before it was even implemented, and the continued supply glut seems a higher probability.

In U.S. economic news, the number of people who applied for unemployment benefits the first week of November fell by -11,000 to 254,000. Initial claims have remained below the key 300,000 threshold for 88 straight weeks, an achievement not seen since 1970. Economists had forecast a reading of 260,000. The less-volatile 4-week moving average of claims rose slightly to 259,750 according to the Labor Department. Stephen Stanley, chief economist at Pierpont Securities wrote, “Whether initial claims are 250,000 or 270,000 in a given week is virtually irrelevant in the big picture. Either one points to an extremely slow pace of layoffs and is consistent with a very healthy and tight labor market.” Continuing claims, those people already receiving unemployment benefits, increased by 18,000 to 2.04 million.

According to a government survey of employers known as the Job Openings and Labor Turnover Survey (JOLTS) companies were intent on hiring 5.49 million people in September, up from 5.45 million the previous month. The JOLTS report showed that the number of job openings rose slightly and remains near record levels—more evidence that companies are willing to hire despite economic uncertainty. In addition, the percentage of people who quit their jobs in September was 2.1%, unchanged from the prior month. The rate of people quitting their jobs rose to normal levels earlier this year for the first time in over 8 years. Workers are more likely to quit their jobs only when they get a better offer or think they can quickly find a better job. The rapid pace of hiring has pushed the unemployment rate below 5% and the tighter labor market is forcing many companies to raise wages to retain and attract skilled workers.

Commercial real estate loans are getting more difficult to obtain as banks continued to tighten lending standards in the 3rd quarter. In a survey by the Federal Reserve of senior loan officers at 69 domestic banks and 21 U.S. branches of foreign banks, standards were tightened on all types of commercial real estate (CRE) loans. Standards for commercial and industrial (C&I) loans were basically unchanged. Demand for C&I loans was slightly weaker among large and middle-market firms. For CRE loans, stronger demand was noted for construction and land development loans, while demand for loans secured by multifamily residential and nonfarm residential properties remained basically unchanged.

Optimism among small business owners rose slightly last month according to the National Federation of Independent Business (NFIB). The NFIB’s Small Business Optimism Index rose +0.8 point to 94.9, beating economists’ forecasts by 0.6 point. More respondents said that now is a good time to expand, however more also reported they expect business conditions to worsen before they improve. In the release, the NFIB stated small business owners are experiencing “record levels” of uncertainty that’s “paralyzing” them. Specifically referenced were “high taxes, ball-and-chain regulations, and spiraling health insurance costs.” According to the survey, the single biggest problem facing small businesses were “taxes” and “government regulations and red tape”.

The confidence of American consumers soared earlier this month as Americans reported that their economic outlook brightened. The University of Michigan’s Consumer Sentiment reading, taken before the results of the presidential election, rose +4.4 points to 91.6. The result was 0.3% higher than the same time last year, and also above the 2016-to-date average of 91.1. Economists had predicted a reading of 88. Sentiment improved even as inflation expectations for the near and long term rose +0.3% to 2.7%. Richard Curtin, director of the survey, released in a note that the change may be a one-time event and that “it may be viewed as added justification for next month’s expected interest rate hike.”

Credit balances of U.S. consumers rose in September, led by student and auto loans according to the Federal Reserve. Outstanding consumer credit, a measure of nonmortgage-related debt, rose by $19.29 billion in September from August. Economists had expected an increase of $18.8 billion. September’s 6.28% seasonally-adjusted annual growth rate was down from August’s 8.77% rate. Household balance sheets have been expanding steadily since early 2011. Of the increase, $15.1 billion was non-revolving credit, namely student and auto loans. This category rose at an annualized 6.68% growth rate in September, following a 9.41% annualized rate in August. Revolving credit, made up of mostly credit card debt, rose at a 5.16% annualized rate in September.

In international news, for the first time ever Canadians’ household debt is now worth more than the country’s entire economy. According to Statistics Canada in the second quarter total household debt amounted to 100.6% of Canada’s gross domestic product. Desjardins economist Benoit P. Durocher noted that Canadians now carry more debt than people in any other G7 country calling it a “fairly troubling snapshot” of Canadians’ finances. “The high level of household debt is undermining the Canadian economy and this represents a significant risk over the medium and long terms,” he wrote in a recent client note. Durocher blamed rising house prices along with piling up on non-mortgage debt. Average consumer non-mortgage debt balances rose to $21,686 at the end of the third quarter, up from $21,195 in the same quarter last year.

In the United Kingdom, under revised rules from the Bank of England, the UK’s largest banks will no longer be “too big to fail” by the year 2022. The new regulations will force banks to hold enough money from their investors to absorb losses without help from the taxpayers. If any bank does collapse, remaining funds will be used for an orderly wind-down. Mark Carney, Governor of the Bank, said the new rules were a “significant milestone”. “The implementation of [the rules] will ensure that banks that provide essential economic functions hold sufficient resources to be resolved in an orderly way, without recourse to public funds, and whilst allowing households and businesses to continue to access the services they need,” he said.

Across the Channel, France saw its fastest job creation in 9 years last quarter with 52,200 jobs created. National statistics office INSEE showed the +0.3% increase in non-farm private sector jobs was driven by an increase of 29,600 temporary jobs. The jobs report is a good sign for a fragile economy whose unemployment rate has been hovering around 10%. With one of the higher birth rates in Europe, France in particular needs to create more jobs to absorb the rise in the labor force.

In Germany, the country’s economic ministry reported several data sets that point to slower growth in the 3rd quarter. Total industrial output fell by -1.8%, reversing much of last month’s 3% gain. Berenberg economist Florian Hense does not believe the decline is the start of a new trend, but rather just monthly volatility. Germany’s adjusted trade surplus was lower than the expected 23 billion euros, coming in at only 21.3 billion euros. Despite those disappointments, economists point to the positive sentiment among German firms. The country’s IFO business survey has risen 2 months in a row, and a purchasing managers’ survey last week hit a nearly 3-year high.

In Asia, economic cooperation between China and Russia is meeting the two countries’ expectations. The two did more than $40 billion in trade this year, according to Russian Prime Minister Dmitry Medvedev. Moscow and Beijing are making additional efforts to increase trade to $200 billion in the next 3-7 years. Medvedev noted that the establishment of a preferential trade regime between the two countries would importantly allow the use of their own national currencies in settlements.

In Japan, gross domestic product was estimated to have grown an annualized +0.9% in the 3rd quarter according to a survey of economists. If so, it would mark the longest stretch of growth for Japan in 3 years. Household spending, which accounts for roughly 60% of Japan’s GDP, is expected to fall -0.1% on the quarter. The gain is estimated to have come from a +1.9% rebound in exports for the quarter, combined with a fall in imports. Together, economists predict that net exports added 0.5% to the figure. Despite the weak demand at home, the 0.9% estimate was still welcome news to Japan’s leadership. The Bank of Japan most recently estimated Japan’s growth rate at 0.24%, while the Cabinet Office estimates 0.3%.

Finally, trading in the financial markets has become quite sophisticated over the last decade. Added to traders’ lexicon are terms like algorithmic trading, dark pools, and high-frequency trading. However, one aspect of trading continues to be the Wild West—the so-called “after-hours” or overnight market. After-hours sessions almost always have less liquidity and far fewer participants than the day session, which means prices spike up and down much more violently, orders receive poor executions (“fills”), and overall trading can be more costly. Late on Tuesday evening, when the presidential election began to tilt in favor of Donald Trump, the bottom started falling out of the overnight market. At one point, Dow futures had plunged over -800 points and the S&P lost -5.7% as panicked investors sold. Selling begets selling when “stops” are hit, triggering further selling. Paul Krugman, leftist economist at the New York Times, aghast at the thought of a President Trump, tweeted when the markets were falling “If the question is when markets will recover, a first-pass answer is never….we are very probably looking at a global recession, with no end in sight.” His hyperbole was completely overblown, of course, as by market open almost all of the overnight carnage had disappeared. Investors who sold in the after-hours market missed out on the recovery rally that took place that morning and continued the rest of the week. Bespoke Investment Group used the opportunity to remind investors in a blog post that “The best advice anyone could ever receive in their formative years is that whenever an important and emotional decision needs to be made, it often helps to ‘sleep on it.’” Marketwatch.com added another timeless piece of wisdom: “Teenagers and investors alike should be reminded that nothing good ever happens in the middle of the night!”

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(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, FactSet; Figs 1-5 source W E Sherman & Co, LLC)

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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 23.25 from 20.25, while the average ranking of Offensive DIME sectors rose to 11.25 from the prior week’s 14.00. The Offensive DIME sectors continue to lead Defensive SHUT sectors. Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

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

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

Sincerely,

Dave Anthony, CFP®

FBIAS™ market update for the week ending 11/4/2016

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 Fig. 1 for the 100-year view of Secular Bulls and Bears.

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Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best. The CAPE is at 25.82, down from the prior week’s 26.33, 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 Fig. 2).

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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 Fig. 3) is in Cyclical Bull territory at 51.91, down sharply from the prior week’s 55.20.

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In the intermediate picture:

The Intermediate (weeks to months) Indicator (see Fig. 4) turned negative on October 14th. The indicator ended the week at 14, down from the prior week’s 19. Separately, the Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was positive entering October, indicating positive prospects for equities in the fourth quarter of 2016.

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Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), 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), indicating a potential uptrend in the longer timeframe. The Quarterly Trend Indicator (months to quarters) is positive for Q4, and the Intermediate (weeks to months) timeframe (Fig. 4) is negative. Therefore, with two of three indicators positive, the U.S. equity markets are rated as Mostly Positive.

In the markets:

Markets were down around the world as heightened uncertainty surrounding the upcoming Presidential election appeared to weigh on sentiment. The S&P 500 recorded its ninth consecutive daily decline, a streak not seen since 1980, and ended the week down -1.94%. The Dow Jones Industrial Average fell -272 points to close at 17,888, a loss of -1.50%. The tech-heavy NASDAQ Composite fell -143 points (-2.77%), the worst of the major averages. The MidCap S&P 400 index dropped -1.4%, and the SmallCap Russell 2000 fell -2%.

In international markets, Canada’s TSX joined the American markets by ending the week down -1.9%. Across the Atlantic, the declines were more substantial. The United Kingdom’s FTSE plunged ‑4.3%, France’s CAC 40 fell ‑3.8% and Germany’s DAX that was off ‑4.1%. Italy’s Milan FTSE retraced 6 straight weeks of gains by plunging -5.8%. In Asia, China’s Shanghai Stock exchange was among the few bright spots in the world, rising +0.68%, but Japan’s Nikkei fell ‑3.1% and Hong Kong’s Hang Seng retreated -1.4%. Developed international markets as a group, as measured by the MSCI EAFE Index, fell -2.1% while emerging markets as a group, as measured by the MSCI Emerging Markets Index, fell -2.7%.

In commodities, precious metals experienced their fourth week of gains as Gold rose +2.2% to $1,304.50 an ounce. Silver rallied +3.2% and closed at $18.37 an ounce. The industrial metal copper had a second week of solid gains, ending the week up +3.3%. West Texas Intermediate crude oil had its second consecutive down week, plunging -9.5% to $44.07 per barrel, as OPEC members continue to quarrel amongst themselves over proposed production restraints that appear less and less likely to take effect.

In U.S. economic news, the country added 161,000 new jobs last month, pushing the unemployment rate down to nearly an 8-year low of 4.9%. Analysts see the increase in hiring as a sign that the economic recovery still continues despite weakness earlier in the year. Education and health services, professional and business services, and financial activities led the hiring. One facet of the improved labor market is that firms have been forced to raise wages to fill open positions. In addition, executives continue to have difficulty finding skilled employees. The effect is that many companies have been forced to boost pay to attract or retain qualified workers. Hourly pay for the typical employee rose +0.4% last month to $25.92, a gain of +2.8% over the past year. The less-cited broader measure of unemployment, known as the U-6 rate, fell -0.2% to 9.5%. The U-6 rate includes part-time workers who can’t find full-time positions and those jobseekers who have given up looking for work. Although elevated, the U-6 rate continues to trend down.

The Labor Department reported that the number of people who applied for new unemployment benefits rose +7,000 to 265,000, a 3-month high. Despite the increase the overall rate of layoffs remains relatively low. Initial claims for unemployment dropped to a 43-year low of 246,000 in early October before turning higher the last few weeks. Still, claims have remained below the key 300,000 threshold for over a year and a half.

The private sector added the fewest number of jobs in almost half a year according to payroll processer ADP. Employers added 147,000 private sector jobs last month, missing expectations for a gain of 170,000. Mark Zandi, chief economist at Moody’s Analytics stated that the pace of job growth appears to be slowing. “Behind the slowdown is businesses’ difficulty filling open positions. However, there is some weakness in construction, education, and mining,” he said. In the details of the report, small private-sector businesses added 34,000 jobs, medium businesses added 48,000, and large businesses added 64,000. All of the gains were in the service sector where 165,000 jobs were added. Manufacturing lost 1,000 jobs last month.

American consumers increased their spending last month, but overall consumer spending for the third quarter remained tepid. The Commerce Department reported that spending rose +0.5% in September, but that followed a negative reading in August and a downwardly-revised gain in July. Gains were broad as Americans bought more cars and other durable goods, and spent more on gasoline, rent, eating out, and health care. Overall consumer spending for the 3rd quarter grew at a more modest +2.1%, following a +4.3% advance in the 2nd quarter.

A rise in consumer prices also pushed up the rate of inflation over the past year to +1.2%, as measured by the Personal Consumption Expenditures Index (the Federal Reserve’s preferred inflation gauge). The rise in inflation is starting to impact consumers, as after-tax income was flat for a second consecutive month. Excluding inflation, incomes rose +0.3% while the savings rate fell slightly to 5.7%.

The Federal Reserve indicated that the time for an interest-rate hike is approaching and that it doesn’t need much additional evidence before acting. The Fed policy committee voted 8 to 2 to maintain interest rates in the 0.25% to 0.5% range. The lack of a move was widely expected and there was little response in the financial markets. According to the statement, “The committee judges that the case for an increase in the federal funds rate has continued to strengthen but decided, for the time being, to wait for some further evidence of further progress toward its objectives.” The general consensus among analysts is that the Fed will be ready to hike interest rates at its meeting on December 13-14, barring any shocks from economic data or financial markets. There is also belief that the Fed didn’t want to make a move just days away from the presidential election to avoid placing the central bank into the political landscape.

Spending for construction projects fell -0.4% last month, according to the Commerce Department. The drop surprised economists who had expected growth of +0.4%. On an annual basis, the $1.15 trillion spent on both residential and non-residential projects was -0.2% less than a year ago—the first year-over-year decline in five years. In September, overall spending on private construction projects fell -0.2%. Residential spending rose +0.5%, but was offset by a -1% drop in nonresidential projects. Spending on public construction projects fell ‑0.9%.

Factory activity in the Chicago area slowed a bit, suggesting the overall economy lost some momentum in the 3rd quarter. The Chicago Purchasing Managers Index (PMI) fell -3.6 points to 50.6 last month, the lowest level since May. The decline was led by a slowdown in production, which dropped to 54.4 from 59.8. New orders also fell to the lowest level since May. The prices paid index rose to its highest level since fall of 2014, another indication that inflation is starting to pick up.

Despite the Chicago-area report, however, nationwide manufacturing activity accelerated last month according to the Institute for Supply Management’s (ISM) manufacturing index, which rose to 51.9. The reading was the highest in 3 months and up +0.4% from September. Readings above 50 indicate more companies are growing instead of shrinking. In the details of the report, new orders, production, employment, and new export orders all remained in expansion, with only new orders growing at a slower pace. New orders are used by analysts to estimate future demand. A slower pace of new orders suggests that companies remain cautious, especially with the U.S. presidential election less than a week away.

The Commerce Department reported that U.S. factory orders rose for the 3rd consecutive month, rising a seasonally-adjusted +0.3%. However, that was down from a +0.4% reading in August. Economists had expected a +0.2% gain. However, despite the string of increases, factory orders were still down -2.3% on an annual basis. Manufacturing accounts for about 12% of the economy, and has been under pressure from a stronger U.S. dollar and weakening global demand. Factories also reported a slowdown in new orders, which will weigh on manufacturing activity into the near future.

Firms and employees boosted their productivity in the 3rd quarter, surging to a 3.1% annual pace. It’s the first gain since the fall of last year, and the largest advance in 2 years. The improvement was due to a significant increase in the amount of goods and services produced, far more an increase in the amount of time workers put on the job. The Labor Department reported that the output of goods and services rose +3.4%, while the amount of time employees worked was up only +0.3%. Despite the improvement, productivity has grown less than half its historical average during the economic recovery. Since 2007, productivity has barely risen +1% annually. Going back to 1945, productivity has averaged an annualized growth rate of +2.2%.

The Canadian economy added 44,000 new jobs last month, but the jobless rate remained at 7% because more people were also looking for work. Statistics Canada reported that the great majority of the jobs came from Ontario and British Columbia where +25,000 and +15,000 new jobs were added, respectively. Most other provinces were essentially unchanged. The results were welcome news for economists who had forecasted a decline of -15,000 jobs. However, most of the gains were in part-time jobs where +67,000 new positions were added, while full-time jobs lost -23,000 during the month.

Across the Atlantic, the British government has vowed to appeal a High Court ruling that it must seek parliament’s approval before starting talks to exit the EU. The judgement will most likely delay “Brexit”, the British exit from the European Union. Three senior judges ruled that Prime Minister Theresa May’s government does not unilaterally have the power to trigger Article 50 of the EU’s Lisbon Treaty, the formal notification of intention to leave the bloc. May had promised to begin the process by the end of March, but the court’s decision raises the probability of a protracted parliamentary fight instead.

In Germany, a very solid Purchasing Managers’ Index (PMI) reading and the fastest job creation in 5 years reinforced Germany’s place as the economic powerhouse of the Eurozone. Services rebounded last month, helping the private sector to expand at the second-fastest monthly rate this year. The PMI jumped to 55.1, up +2.3 points from September. The reading was in line with estimates and remained comfortably above the 50 line that indicates growth. The main driver was an increase in the service sector after 2 weak summer months. Markit economist Oliver Kolodseike said, “Solid improvements in new business inflows and employment levels contributed to the upturn and underline that the domestic economic fundamentals in Germany are healthy as we start the final quarter.”

By contrast, Italian statistics agency ISTAT reported there are no signs to suggest Italy’s economy will accelerate in the final quarter this year. GDP in the Eurozone’s 3rd largest economy stagnated in the 2nd quarter, but most economists are expecting modest growth for the 3rd quarter. ISTAT’s latest monthly economic note gave no forecast for the 3rd quarter but did state its composite leading indicator “does not signal any prospect of an acceleration in the final months of the year.” Prime Minister Matteo Renzi maintains a forecast of a 0.8% growth rate in 2016.

In Asia, analysts are becoming increasingly concerned about growing debt loads and a potential real estate bubble in China that threatens to weigh heavily on growth in Asia, and which could be a drag on the entire global economy if it bursts. In September, chief economist of the People’s Bank of China, Ma Jun, argued that the Chinese government must take steps to suppress excessive real estate speculation. ”Measures should be taken to put a brake on the excessive bubble expansion in the property sector, and we should curb excessive financing into the real estate sector,” Ma said.

In Japan, the world’s 3rd largest economy is expected to have grown at an annualized rate of +0.9% in the third quarter, according to a poll of 22 economists. Hidenobu Tokuda, senior economist at Mizuho Research Institute stated, “The economy is escaping from a lull but we cannot say it returned to a track of sustainable growth because private spending and capital expenditure remained low.” Private consumption, which makes up roughly 60% of GDP, was believed to have stalled after improving the previous two quarters. Capital spending was seen up a slight +0.1%, the first increase in 3 quarters.

clip_image002Finally, can the financial markets give a clue as to whether the incumbent or challenger has the better chance of winning a Presidential election? The answer is: probably! Financial blog Zero Hedge published a study this week that showed that market performance in the 3 months leading up to a Presidential Election has displayed “an uncanny ability to forecast who will win the White House”. Since 1928 there have been 22 elections. In 14 of them, the S&P 500 index was up during the 3 months prior to the election. The incumbent won in 12 of those 14 instances. Conversely, in 7 of the 8 elections where the S&P 500 was down in the 3 months prior to the election, the incumbent party lost. The market has thus been correct 86.4% of the time in forecasting the election. With the S&P 500 down about -4% in the last 3 months, this measure says the incumbents – the Democrats – will lose.

(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, FactSet; Figs 1-5 source W E Sherman & Co, LLC)

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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 20.25 from 23.0, while the average ranking of Offensive DIME sectors rose slightly to 14.0 from the prior week’s 14.25. The Offensive DIME sectors continue to lead Defensive SHUT sectors. Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

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

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

Sincerely,

Dave Anthony, CFP®

FBIAS™ market update for the week ending 10/28/2016

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 Fig. 1 for the 100-year view of Secular Bulls and Bears.

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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 26.33, down from the prior week’s 26.51, 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 Fig. 2).

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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 Fig. 3) is in Cyclical Bull territory at 55.20, down from the prior week’s 57.82.

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In the intermediate picture:

The Intermediate (weeks to months) Indicator (see Fig. 4) turned negative on October 14th. The indicator ended the week at 19, down from the prior week’s 23. Separately, the Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was positive entering October, indicating positive prospects for equities in the fourth quarter of 2016.

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Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), 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), indicating a potential uptrend in the longer timeframe. The Quarterly Trend Indicator (months to quarters) is positive for Q4, and the Intermediate (weeks to months) timeframe (Fig. 4) is negative. Therefore, with two of three indicators positive, the U.S. equity markets are rated as Mostly Positive.

In the markets:

Most of the U.S. major indexes were down for the week as third quarter earnings reports continued to stream in. The Dow Jones Industrial Average had a second week of little movement, rising only +0.09% or +15 points to close at 18,161. The Nasdaq Composite was decisively negative after less-than-stellar earnings reports from tech-bellwethers Apple and Amazon: the NASDAQ fell -1.28% to end the week at 5,190. Once again, smaller cap indexes took it on the chin as the SmallCap Russell 2000 declined -2.5% and the MidCap S&P 400 ended down ‑1.7%, while the LargeCap S&P 500 gave up “only” -0.7%.

In international markets, Canada’s TSX retraced some of last week’s gain, ending down -1%. Across the Atlantic the United Kingdom’s FTSE fell -0.34%. Europe’s mainland major bourses were mixed: France’s CAC 40 rose +0.28%, while Germany’s DAX fell -0.14%, and Italy’s Milan FTSE had its 6th week of gains by rising +0.9%. Asian major markets were mixed as well. China’s Shanghai composite rose for a 3rd straight week, gaining +0.4%. Japan’s Nikkei had a second week of gains, adding +1.5%, but Hong Kong’s Hang Seng Index fell -1.8%. Developed international markets as a group, as measured by the MSCI EAFE Index, fell -1.8% while emerging markets as a group, as measured by the MSCI Emerging Markets Index, fell -0.7%.

In commodities, precious metals were bid up as Gold rose +$9.10 to end the week at $1,276.80 an ounce, and Silver rebounded +1.73% to close at $17.80 an ounce. The industrial metal copper retraced almost 3 weeks of losses, rebounding more than +5%. Oil went the other way, having its first negative week in 6, falling over ‑4.2% to close at $48.70 for a barrel of West Texas Intermediate crude oil.

In U.S. economic news, the number of people who applied for new unemployment benefits fell by 3,000 to 258,000 according to the Labor Department. Initial jobless claims have remained below the key 300,000 threshold watched by economists for 86 straight weeks, a feat last seen in 1970. Economists had forecast claims would total a seasonally adjusted 255,000. Analysts note that the labor market for skilled workers remains tight, and firms have been reluctant to fire workers since they might not be able to find suitable replacements. The less-volatile 4-week moving average of claims rose by 1,000 to 253,000. Continuing claims, the number of people already receiving unemployment benefits, declined by 15,000 to 2.04 million. Continuing claims are released with a 1 week delay.

In housing, U.S. home prices continued to rise according to the closely-watched S&P CoreLogic Case-Shiller 20-City Index. Home prices rose +0.4% in August, and were up +5.1% compared to the year-ago period. Economists had forecast a +0.2% gain. In the three months ending in August, 10 cities in the index recorded higher yearly gains than in July. Denver, Portland, and Seattle saw the greatest price gains. Case-Shiller’s national index is now just 0.1% below its peak recorded in 2006, although the 20-city sub-index remains 7.2% below its peak. Echoing the Case-Shiller report, the Federal Housing Finance Agency’s (FHFA) House Price Index was also up +0.7% in August, gaining +0.2% over July. FHFA’s index is made up of prices on properties guaranteed by Fannie Mae and Freddie Mac. The index is up +6.4% from August of last year.

New home sales reached the second-highest level of the recovery running at a seasonally-adjusted annualized rate of 593,000 last month. The Commerce Department reported that new home sales for September were +3.1% higher than in August and +29.8% higher than a year ago. The median sales price of a new home sold last month was $313,500, up +6.7% over August, while the average price was $377,700. At the current sales pace, there is a 4.8 month supply of homes available on the market (a 6 month supply is desirable). Despite the demand, builders have been reluctant to ramp up construction of new homes, with many continuing to report difficulties finding affordable labor and lots. So far this year, new home sales have averaged an annualized sales rate of 564,000—a substantial increase of +13% over the same period last year.

The government reported that the nation’s Gross Domestic Product (GDP) grew at an annualized +2.9% rate in the 3rd quarter, the fastest pace in 2 years. The advance was substantially driven by a huge spike in soybean exports following a poor harvest in South America and elsewhere (accounting for +0.9% of the +2.9% all by itself), and a rebound in business inventories. The improvement in GDP was significant compared to the first half of the year, when the U.S. grew just barely over +1% annualized. The details of the report reveal that consumers increased spending by +2.1%, exports increased the most in almost 3 years, and businesses restocked shelves following a decline in inventories in the spring. On the negative side, higher imports, a second consecutive quarterly decline in spending on new construction, and less investment in business equipment weighed on the final result. Sam Bullard, senior economist at Well Fargo Securities summarized the report aptly, “Bottom line, the U.S. economic expansion remains resilient, yet unremarkable.”

The Chicago Fed’s National Activity Index improved from a -0.72 in August to a slightly negative -0.14 last month as factory production, housing, consumer spending and business orders all showed improvement. The index itself improved but the less-volatile 3-month moving average, a measure watched more closely by analysts, continued to weaken to a -0.21 from -0.14 in August. The September reading shows that economic growth continues to run below its potential. Bernard Yaros, economist at Moody’s remarked that the reading “dovetails with incoming U.S. economic data that have been mixed but supportive enough to keep a December rate hike on the table for Federal Reserve policymakers.” The Chicago Fed index is a weighted average of 85 different economic indicators, designed so that zero represents trend growth and a three-month average below negative 0.70 suggests a recession has begun.

In U.S. manufacturing, Markit said its flash Purchasing Managers Index (PMI) rose to 53.2 this month, up +1.7 points from September, rebounding from a 3-month low. In the report, new orders and goods produced grew by the fastest increase in a year. Production has risen for 5 consecutive months. Markit said that the October PMI report “signaled that U.S. manufacturers started the fourth quarter in a strong fashion.” Markit noted they recorded improvement in manufacturing conditions in most of the world’s other major economies as well.

In contrast, the Commerce Department’s durable-goods orders weakened slightly last month, predominantly due to lower demand for military hardware and computers. Durable goods, goods expected to last longer than 3 years, fell -0.1%, missing expectations of a +0.1% increase. However, stripping out the volatile defense category, new orders actually rose +0.7%. Customers ordered more heavy machinery, new autos, and commercial planes the Commerce Department noted. Although overall demand remained resilient, orders for core capital goods (a key measure of business investment) fell by -1.2% last month, and are down -4.1% over the past year.

Consumer confidence took a hit in October as uncertainty surrounded the presidential election and more consumers reported that jobs were a bit harder to find. The confidence of Americans in the U.S. economy fell to a 3-month low of 98.6, down from 103.5 in September, the Conference Board said. The decline was worse than expected. Despite the drop, consumer confidence is still near a post-recession peak. The present situation index fell -7.3 points to 120.6 as fewer Americans reported that jobs were “plentiful”. Lynn Franko, director of economic indicators at the Conference Board said, “Overall, sentiment is that the economy will continue to expand in the near-term, but at a moderate pace.”

The University of Michigan’s Consumer Sentiment index fell to 87.2, a loss of -4 points, to the lowest level since 2014. In the report, Americans were less upbeat about both current and future conditions. The drop in sentiment suggests that consumer spending may continue to moderate. When asked about the year-ahead for the economy, only 35% of respondents expected good times, the lowest reading since fall of 2013.

In international economic news, a group of prominent Canadians known as the Century Initiative has proposed that Canada reach a bold target of 100 million citizens by the end of the century. The Canadian federal government’s Advisory Council on Economic Growth has also recommended that immigration be increased by 50% from roughly 300,000 a year to 450,000. With a current population of about 36 million, Canada has a long way to go to reach the group’s target of 100 million. At a population of 100 million, Canada would be second only to the United States among the G-7 countries!

In the United Kingdom, GDP growth slowed to +0.5% following the Brexit vote, down -0.2% from the 2nd quarter. The Office of National Statistics reported that despite the slowdown, growth was still stronger than the +0.3% expected by economists. Britain has now grown for 15 quarters in a row, and is now a robust 8.2% higher than the GDP peak set in 2008. The number also beat the latest forecast from the Bank of England, which had predicted growth of only +0.1%. Joe Grice, head of the Office of National Statistics, said the figure shows “little evidence” of a significant effect in the immediate aftermath of the Brexit vote.

In France, the economy grew less than expected, rising only +0.2% in the 3rd quarter. The French economy was weighed down by prolonged weakness in consumer spending, declining business investment, and a drop in tourism following terrorist attacks. French consumers, a main pillar of economic growth for the country, were subdued in the 3rd quarter according to the French National Institute of Statistics and Economic Studies. The Economy and Finance Minister Michel Sapin acknowledged that it will be “difficult” to achieve the official target of +1.5 percent growth this year on which France has based its budget projections, inevitably leading to further deficits.

In Germany, German Economy Minister Sigmar Gabriel said that China is strategically buying up key technologies in Germany while protecting its own companies against foreign takeovers with “discriminatory requirements.” In a guest column in Die Welt newspaper, Gabriel urged the EU to adopt a tougher approach to China to ensure a level playing field. “Nobody can expect Europe to accept such foul play of trade partners,” Gabriel wrote, adding that Germany was one of the most open economies for foreign direct investments. In China, on the contrary, foreign direct investments by European companies are being hampered and takeovers are only approved under discriminatory requirements, he said.

In Asia, China’s currency sank to its lowest level against the U.S. dollar in 6 years – good news for the country’s economy, but raising concerns that Chinese policymakers were becoming more tolerant of their currency’s ongoing weakness. The yuan is on track for a loss of -1.6% for October, the largest monthly decline since China’s shock devaluation in August 2015. China officially states that it wants its currency to be more market-driven, but traders note that in reality it maintains tight control over the yuan’s daily exchange rate – and down seems to be the direction the government has chosen.

Japanese core consumer prices fell for the 7th month in a row, down -0.5% last month from a year earlier. A separate index from the Bank of Japan that strips out the volatile food and energy prices, showed inflation hit a 3-year low of +0.2% in September, down -0.2% from August. The data supports the BOJ’s view that it will take quite some time for inflation to reach its target of 2%, and that it must therefore maintain its aggressive stimulus program.

Finally, what do you consider to be “fast shipping?” The definition appears to be rapidly changing. The chief cause of this change is Amazon, according to a study by accounting and consulting firm Deloitte. As Amazon Prime subscribers grow more and more accustomed to getting their orders in 2 days, deliveries that take any longer are now viewed with frustration.

In Deloitte’s study, just 42% of consumers surveyed now view 3-4 day shipping as “fast”, whereas almost two thirds of consumers considered 3-4 days to be “fast” just last year! Amazon is now upping the pressure on traditional outlets even more, as it begins rolling out same-day delivery to more markets.

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(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, FactSet; Figs 1-5 source W E Sherman & Co, LLC)

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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 23.0 from 23.5, while the average ranking of Offensive DIME sectors rose to 14.25 from the prior week’s 16.5. The Offensive DIME sectors continue to lead Defensive SHUT sectors. Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

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

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

Sincerely,

Dave Anthony, CFP®

FBIAS™ market update 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 Fig. 1 for the 100-year view of Secular Bulls and Bears.

image

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 Fig. 2).

image

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 Fig. 3) is in Cyclical Bull territory at 63.88, down from the prior week’s 67.21.

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In the intermediate picture:

The Intermediate (weeks to months) Indicator (see Fig. 4) 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.

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Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), 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), 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) 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.

clip_image002Finally, 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, FactSet; Figs 1-5 source W E Sherman & Co, LLC)

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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, Folio Institutional, LLC.

Sincerely,

Dave Anthony, CFP®

FBIAS™ market update 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 Fig. 1 for the 100-year view of Secular Bulls and Bears.

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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 Fig. 2).

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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 Fig. 3) is in Cyclical Bull territory at 67.21, up from the prior week’s 66.70.

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In the intermediate picture:

The Intermediate (weeks to months) Indicator (see Fig. 4) 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.

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Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), 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), 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) 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.

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(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, FactSet; Figs 1-5 source W E Sherman & Co, LLC)

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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, Folio Institutional, LLC.

Sincerely,

Dave Anthony, CFP®

FBIAS™ market update 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 Fig. 1 for the 100-year view of Secular Bulls and Bears.

image

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 Fig. 2).

image

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 Fig. 3) is in Cyclical Bull territory at 66.70, down from the prior week’s 69.62.

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In the intermediate picture:

The Intermediate (weeks to months) Indicator (see Fig. 4) 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.

image

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), 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), 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) 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.

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(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, FactSet; Figs 1-5 source W E Sherman & Co, LLC)

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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, Folio Institutional, LLC.

Sincerely,

Dave Anthony, CFP®

FBIAS™ market update 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 Fig. 1 for the 100-year view of Secular Bulls and Bears.

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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 Fig. 2).

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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 Fig. 3) is in Cyclical Bull territory at 69.62, up from the prior week’s 67.41.

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In the intermediate picture:

The Intermediate (weeks to months) Indicator (see Fig. 4) 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.

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Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), 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), 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) 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.

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(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, FactSet; Figs 1-5 source W E Sherman & Co, LLC)

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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, Folio Institutional, LLC.

Sincerely,

Dave Anthony, CFP®