FBIAS™ Fact-Based Investment Allocation Strategies for the week ending 4/8/2016

The very big picture:

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

Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best.   The CAPE is at 25.86, down from the prior week’s 26.18, after having earlier reached the level also reached at the pre-crash high in October, 2007.  Since 1881, the average annual return for all ten year periods that began with a CAPE around this level have been just 3%/yr (see graph below).

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

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate.  The U.S. Bull-Bear Indicator (see graph below) turned negative on January 15th, and remains in Cyclical Bear territory at 49.50, down from the prior week’s 51.21.

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) turned positive on January 26th.  The indicator ended the week at 36 (the maximum value possible), unchanged from the prior week.  Separately, the quarter-by-quarter indicator – based on domestic and international stock trend status at the start of each quarter – gave a positive indication on the first day of April for the prospects for the second quarter of 2016.

Timeframe summary:

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

In the markets:

This week was marked by broad weakness in the U.S. equity market as all major indexes lost ground.  The Dow Jones Industrial Average lost -215 points to end at 17,577, down -1.2%.  The NASDAQ declined -1.3% to close at 4,850.  Both Transports and Utilities lost ground, declining -1.9% and -1.6%, respectively.  Large caps showed slight relative strength with the S&P 500 declining “only” -1.2%, while the S&P 400 midcap index declined 1.69% and the small cap Russell 2000 gave up -1.8%.  It was the S&P 500 Index’s biggest weekly drop in over 2 months.

In international markets, Canada’s Toronto Stock Exchange declined -0.3%.  The United Kingdom’s FTSE was the only major market to shrug off the broad weakness closing up +0.95%.  Germany’s DAX gave up -1.7% and France’s CAC 40 lost -0.44%.  In Asia, all major markets were likewise down with China’s Shanghai Stock Exchange declining -0.8%, Japan’s Nikkei dropped -2.1%, and Hong Kong’s Hang Seng losing -0.6%. 

In commodities, the industrial metal copper was down a third straight week, losing -3.78%.  Precious metals, though, were higher with Gold up +1.65% to $1,243.80 an ounce.  Silver rose +2.22% to end the week at $15.38 an ounce.  Oil was the big winner in commodities with a barrel of West Texas Intermediate crude oil rising +8.4% to end the week at $39.72.

In U.S. economic news, the American Bankers Association reported that home-equity loan delinquencies fell below their 15-year average in the 4th quarter, down -0.23% to just 2.86% of all accounts.  James Chessen, ABA’s chief economist stated, “It’s been a long, rocky road, but home equity delinquencies have finally worked their way back to historical norms.”

The Commerce Department reported that new orders for manufactured goods fell -1.7% in February, marking the 3rd decline in 4 months.  Ex-transportation, factory orders fell -0.8%, down a 4th straight month.  Core capital goods orders, which are viewed as a proxy for future business investment, declined -2.5% versus January.  But on a positive note, overall factory orders were slightly higher versus a year earlier – the first positive year-over-year reading in a year and a half.  Contrary to the Commerce Department’s reports, the Institute for Supply Management’s (ISM) manufacturing index and several regional factory gauges, industrial activity may have rebounded in March with ISM’s national report pointing to solid gains in orders coming in at 51.8, the highest in seven months.  In the details of the report, the employment gauge pointed to new hiring, new order growth picked up, and the export gauges rose to a new one-year high to 58.5. 

ISM’s service sector index showed faster growth in March after a two-year low last month, supporting evidence that the U.S. economy may be firming up as it heads into the spring.  The services gauge rose +1.1 last month to 54.5, rising further into expansion.

Wholesale inventories tumbled at their fastest rate in nearly 3 years, hinting that economic growth in the first-quarter was probably weaker than expected.  Wholesale inventories have fallen for the last 5 months as companies work to reduce high stockpile levels.

In international economic news, Canada’s economy added 41,000 jobs last month – more than 4 times what economists were expecting.  Statistics Canada’s Labour Force Survey showed there were more people employed in Alberta, Manitoba, Nova Scotia, and Saskatchewan.  Employment declined in Prince Edward Island and was little changed in the other provinces.  By sector, health care was the winner with 25,000 new jobs.  Manufacturing, which had been showing some encouraging signs the last few months, lost 32,000.  The natural resources sector, which includes mining and oil and gas, lost 2,100 jobs.

In the United Kingdom, there was a double-dose of bad economic news as factory output fell to the lowest level since 2013, while the trade gap remained large.  The duo of disappointing reports added to the recent spate of negative news including the worst decline in productivity since 2008 and the service sector’s slowest growth in 3 years.

On the European mainland, there was positive news in Germany where rating agency Moody’s said that Germany expected a slight acceleration of its growth to +1.8% due to robust domestic demand.  In France, stuck in economic doldrums for years, the popular economic minister Emmanuel Macron has launched his own political movement to promote “fresh ideas” ahead of next year’s presidential election.  The movement is known as En Marche! (In Motion) and is “neither right-nor left-wing” and aims to promote “economic, social, and political freedom.”

In Asia, China’s Premier Li Keqiang reported that economic indicators showed signs of improvement in the first quarter, but complained that a sluggish world economy and volatile markets are not providing a firm foundation.  Li said the overall economic situation was nonetheless better than expected and he was confident the government would be able to maintain medium to high economic growth despite the difficulties.

Japanese finance minister Taro Aso is dealing with the difficult situation of a rising Yen which threatens the government’s hopes of stronger growth.  The currency hit a fresh high of 107.6 against the dollar this week.  Aso said that the government, which wants a lower yen in order to spur export demand, would take steps as needed to counter what he termed “one-sided” moves in the currency market.  The Bank of Japan surprised investors earlier this year when it announced a move towards negative interest rates in an attempt to spur investment and keep the yen low, and the recent runup in the value of the yen has been very frustrating to Japan’s central planners.

Finally, it has been noted several times in this space that corporate profits are falling (called by some an “earnings recession”).  Intuitively, one would think that falling earnings would result in a falling market since, as CNBC’s Larry Kudlow frequently says, “Profits are the mother’s milk of the stock market.”  But Mark Hulbert of marketwatch.com, citing data from Ned Davis Research, says “not so fast!”  It turns out that the stock market’s sweet spot, in terms of earnings growth, is a fairly tolerant range of year-over-year profit change from +5% down to 20%, as shown in the following chart.

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

The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market.  The average ranking of Defensive SHUT sectors rose to 10.8, up from the prior week’s 12.3, while the average ranking of Offensive DIME sectors fell to 11.8 from the prior week’s 10.3.  The Defensive SHUT sectors retook the lead from the Offensive DIME sectors.  Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

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

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

Sincerely,

FBIAS™ Fact-Based Investment Allocation Strategies for the week ending 4/1/2016

The very big picture:

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

Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best.   The CAPE is at 26.18, up from the prior week’s 25.71, after having earlier reached the level also reached at the pre-crash high in October, 2007.  Since 1881, the average annual return for all ten year periods that began with a CAPE around this level have been just 3%/yr (see graph below).

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

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate.  The U.S. Bull-Bear Indicator (see graph below) turned negative on January 15th, and remains in Cyclical Bear territory at 51.21 up from the prior week’s 49.03.

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) turned positive on January 26th.  The indicator ended the week at 36 (the maximum value possible), unchanged from the prior week.  Separately, the quarter-by-quarter indicator – based on domestic and international stock trend status at the start of each quarter – gave a positive indication on the first day of April for the prospects for the second quarter of 2016.

Timeframe summary:

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

In the markets:

Equities continued their strong rally from the February lows, fueled by hopes of continued help from central banks around the world in the form of low – or even negative – interest rates.  The S&P 500 LargeCap index is now back into positive territory for 2016, along with the Dow Jones Industrial Average and the S&P 400 MidCap index, while the SmallCap Russell 2000 and NASDAQ Composite indexes still are negative for the year.  For the week, the S&P 500 gained +36 points closing at 2,072, up +1.8%.  The Dow Jones Industrial Average added +277 points, ending the week at 17,792 (+1.58%).  The S&P 400 MidCap index and SmallCap Russell 2000 made up some lost ground on their larger brethren, gaining +2.67% and +3.53% respectively.  The NASDAQ Composite index is once again nearing the 5000-level at 4,914, up a strong +2.95%.  Much of the market’s gains came on Tuesday following a speech by Federal Reserve Chair Janet Yellen to the Economic Club of New York.  Investors were enthused by Yellen’s cautious tone regarding hiking interest rates further and her acknowledgement of slowing growth overseas.

In international markets Canada’s Toronto Stock Exchange gained +0.62% despite continued weakness in oil.  In Europe, the United Kingdom’s FTSE rose +0.65%, while on Europe’s mainland Germany’s DAX and France’s CAC 40 both ended down, -0.58% and -0.17% respectively.  The worst-performer on the continent was Italy’s Milan FTSE, which declined -2.14% for the week.  In Asia, markets were mixed as China’s Shanghai Stock Exchange rose +1.01%, while Japan’s Nikkei dropped a steep -4.9%. 

In commodities, global growth and particularly China weighed on markets.  The industrial metal copper retreated over -3% while a barrel of West Texas Intermediate crude oil tumbled -7.48% to $36.63.  Oil prices fell sharply on Friday after a member of the Saudi royal family stated that the country will be unwilling to cap production unless an agreement can be reached with Iran and other major producers.  Precious metals ended mixed with Gold rising +0.53% to $1,223.20 an ounce retracing some of last week’s drop, while silver ended down -1% at $15.05.

March Summary: The month of March came in like a Lion…and pretty much stayed that way.  It was a strongly positive month for nearly all equity indexes worldwide, including the U.S.  The strongest gain was logged by those indices hurt the most during the earlier correction: the Russell 2000 SmallCap and the S&P 400 MidCap indices.  They notched gains of +7.8% and +8.3% respectively for March (though even that gain was not quite enough to pull the Russell 2000 into the green for the year).  The LargeCap S&P 500 and Dow Jones Industrial indices didn’t do too shabbily, either, notching gains of +6.6% and +7.1% respectively.  It must be noted though, that as strong as the gains were, they were pretty much recovering ground lost in the earlier declines of January and early February.  Developed and Emerging International market averages both did well, too, rising +6.58% (EFA) and +12.96% (EEM) respectively.

First Quarter Summary: For the first quarter of 2016, the net results masked the wild ups and downs within the quarter.  Well known market maven Art Cashin of UBS appropriately describes this kind of market as “…like commuting by roller coaster. Lots of chills and spills, but you ended up pretty much where you started.”  The Dow Jones Industrial Average and the S&P 500 posted gains with a rise of +1.49% and +0.77%, respectively – both accomplished in the very last days of the quarter.  The NASDAQ composite had its worst quarter since 2009, down -2.75%, and the SmallCap Russell 2000 also declined in the first quarter, down -1.92%.  Developed International markets slipped in the quarter, down 2.66% on average (EFA), while Emerging Markets rose a strong +6.40% (EEM).  Emerging Markets were in part propelled by a monster +27.18% gain in Brazil (EWZ).  The Zika virus, floundering Olympics preparations and poor ticket sales, political scandals in the Presidential office with threats of impeachment – none of these could stop the Brazil market’s rebound from the thorough pounding it took in 2015, when it lost -42%.  Now that’s a rollercoaster for sure!

In U.S. economic news, 215,000 jobs were added last month, matching expectations.  The jobless rate ticked up to 5%, however, as jobseekers flooded into the labor force at the fastest pace since 2007.  The jobless rate rose due to a steady flow of jobseekers that entered or reentered the labor force, pushing the participation rate up to 63% – a two-year high.  The roughly 2.4 million people that joined or re-joined the labor force over the past year where the most since the beginning of 2007.  Retail led the way with a gain of +47,700 jobs, but leisure and hospitality, construction, and health care all showed strong job growth as well.  Manufacturing continued to shed jobs, however.

Private-sector employers continue to hire at a steady rate this month, adding 200,000 jobs, According to the ADP National Employment Report.  Services firms accounted for +191,000 new hires, accounting for nearly all of the gains.  Small firms were responsible for +85,700 jobs, while large employers added +38,800.

Research firm Challenger, Gray & Christmas announced that corporations plan to lay off 48,200 workers in March.  The 12 month layoff total has reached 643,000, the highest since early 2012.  On a positive note, layoffs have receded the past two months after peaking at 75,000 in January.  John Challenger, the outplacement firm’s chief executive stated “it is not just the energy sector that is seeing heavier job cuts.  Layoff announcements have increased significantly in the retail and computer sectors as well.”

Private wage and salary income fell an annualized $12.9 billion in February, or 0.2%, the Commerce Department reported as income gains continue to decelerate.  Overall, personal income rose +$23 billion, or +0.2%, but the gains came in areas that won’t benefit consumers that much.  Rental income, government social benefits, and employer contributions to employee pensions and insurance were the main factors responsible for the gain.  Softening in income growth has historically coincided with a slowdown in consumption.  Personal consumption expenditures rose a mere +0.1% in February, for an annualized growth rate of +2.1%.  In the same timeframe, the annualized gain in private wage income has slowed to +3.6% from +5.6%.

In housing, the S&P/Case-Shiller home price index for January showed the 20-city benchmark index rose +5.7% over the past year.  Portland, Oregon saw the greatest appreciation, up +11.8% in the 12-month period while Chicago saw the least, up just +2.1%.

Consumer confidence rose to 96.2, up two points from February and above the high range of economists’ estimates, according to the Conference Board.  The report isn’t exceptional, but it is moving in a positive direction.  Of the survey respondents, 24.9% expressed the belief that current business conditions are “good”, down -0.6% from last month.  Those saying that business conditions are “bad” retreated slightly to 18.8% from 19%.

US manufacturing moved back into expansion, according to a key factory index.  The Institute for Supply Management’s (ISM) manufacturing index rose to 51.8 last month, crossing the neutral 50 level into expansion territory for the first time since last August.  Economists had expected a reading of 50.5.  New orders and production gauges were both solidly positive, despite weakness in the employment gauge which dropped -0.4 point to 48.1.  More output with less employment is good for productivity, at least.

As mentioned above, this week, Fed Chair Janet Yellen gave a speech to the Economic Club of New York, stating that it was appropriate for U.S. central bankers to “proceed cautiously” in raising interest rates because the global economy presents heightened risks.  Fed officials left their benchmark lending rate target unchanged this month at 0.25% to 0.5% while revising down their estimate for the number of rate increases this year to two hikes instead of the four projected in December.

In the Eurozone, Markit released its latest manufacturing Purchasing Managers Index (PMI) data for the Eurozone at 51.6 last month, up +0.4 point.  Germany remained in expansion at 50.7, up +0.2 point, however France slipped to 49.6—its lowest reading in 7 months and slightly back in contraction territory.  France also reported that consumer prices remained in deflation last month, falling -0.1%.  Markit’s chief economist labeled France as the “weakest link” in Europe right now.

In China, the ratings agency Standard & Poor’s has cut its outlook on China’s government credit to “negative” from “stable” as it believes rebalancing of the world’s second largest economy would take place more slowly than had been expected.  China’s credit rating stands at AA- with a negative outlook. 

In Japan, business sentiment among Japan’s big manufacturers deteriorated to the lowest in nearly three years, and is expected to worsen, according to a closely watched central bank survey.  Big firms also plan to cut capital expenditures in the current fiscal year.  Mari Iwashita, chief market economist at SMBC Friend Securities remarked, “There’s no sign of corporate sentiment bottoming in coming months.”

Finally, this past summer it was widely noted that U.S. corporate earnings growth had stagnated.  The equity markets subsequently also stagnated – along with a lot of volatility, including the worst start to a year in the stock market ever.  Unfortunately, the earnings picture hasn’t improved much since then, and the longer-term outlook seems to be deteriorating. 

Last Friday, the government’s Bureau of Economic Analysis released data showing the corporate profits declined -11.5% in 2015.  Excluding adjustments for inventory valuation and capital consumption, the decline was still -7.6% as shown on the chart below from the St. Louis Fed. 

FactSet’s John Butters observed: “For Q1 2016, the estimated earnings decline is -8.7%.  If the corporate profits index reports a decline in earnings for Q1, it will mark the first time the index has seen four consecutive quarters of year-over-year declines in earnings since Q4 2008 through Q3 2009.”

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

The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market.  The average ranking of Defensive SHUT sectors remained unchanged from the prior week at 12.3, while the average ranking of Offensive DIME sectors fell to 10.3 from the prior week’s 9.8.  The Offensive DIME sectors retained their lead over the Defensive SHUT sectors.   Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

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

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

Sincerely,

FBIAS™ Fact-Based Investment Allocation Strategies for the week ending 3/24/2016

The very big picture:

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

Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best.   The CAPE is at 25.71, down slightly from the prior week’s 25.90, after having earlier reached the level also reached at the pre-crash high in October, 2007.  Since 1881, the average annual return for all ten year periods that began with a CAPE around this level have been just 3%/yr (see graph below).

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

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate.  The U.S. Bull-Bear Indicator (see graph below) turned negative on January 15th, and remains in Cyclical Bear territory at 49.03 down from the prior week’s 50.87.

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) turned positive on January 26th.  The indicator ended the week at 36 (the maximum value possible), unchanged from the prior week.  Separately, the quarter-by-quarter indicator – based on domestic and international stock trend status at the start of each quarter – gave a negative indication on the first day of January for the prospects for the first quarter of 2016.

Timeframe summary:

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

In the markets:

For the holiday-shortened week in the U.S., the Dow Jones Industrial Average declined -86 points ending the week at 17,515 (-0.5%).  The tech-heavy Nasdaq Composite lost -22 points closing at 4,773.50 (-0.5%), while the LargeCap S&P 500 index declined -13 points to close at 2,035.94 (-0.7%).  SmallCaps and MidCaps showed relative weakness compared to their larger brethren as the MidCap S&P 400 fell -1.1% and the small cap Russell 2000 ended down -2.0%.  Utilities managed a slight gain, up +0.25% while Transports declined over -1.8%.

In international markets, Canada’s TSX fell -1%.  In Europe, the United Kingdom’s FTSE gave up -1.34%, Germany’s DAX was down -1%, and France’s CAC 40 declined -2.98%.  In South America, Brazil’s BOVESPA ended down 2.28%.  In Asia, markets were mixed as Hong Kong’s Hang Seng index declined -1.5%, but both Japan’s Nikkei and China’s Shanghai Stock Exchange were up, closing +1% and +0.2% higher, respectively.

In commodities, there was weakness across the board as the precious metals, industrial metals, and energy groups were all in the red.  The recent rally in crude oil took a break after data released on Wednesday showed U.S. stockpiles of oil were again reaching record levels.  Also pressuring commodities was renewed strength in the U.S. dollar against most other currencies.  Gold gave up -$39.30 an ounce to end the week at $1,216.70, a loss of 3%.  Silver declined -3.95% to close at $15.20.  The industrial metal copper lost -2.1%.  Oil was unable to manage a 6th straight week of gains and ended the week down -3.74% to $39.59 a barrel.

In U.S. economic news, a broad and timely indicator of the health of the job market improved significantly this week.  At the beginning of the year, there was a serious slowdown in the annual growth rate of income and employment tax withholdings.  That suggested that the job market was on a much weaker footing than the headline numbers portrayed.  This past week withheld tax grew at a +3.4% gain over the past four weeks following a +2% rise the previous four.  Some analysts prefer the tax collections data because they aren’t seasonally adjusted or revised, even though economists focus much more on the monthly Non-Farm Payroll jobs report, which is prone to big subsequent revisions.

In housing, existing home sales slipped -7.1% in February to a seasonally-adjusted 5.08 million annual rate, according to the National Association of Realtors.  The level of sales, while up +2.2% from this time last year, was the second weakest in a year.  Sales fell in all four regions of the country.  The median existing home price was $210,800, up +4.4% from a year before.  First-time buyers fell to 30% from 32%, while investors purchased 18% of homes. 

New-home sales rose to an annual rate of 512,000 last month according to the Commerce Department, signaling a steady pace for housing activity and beating economists’ estimates by 2000.  The median sales price in February was $301,400 up 2.6% versus a year earlier.  The number of homes for sale was the highest since October 2009.

U.S. orders for durable goods fell -2.8% in February, matching expectations, but the details of the report showed underlying weakness.  Excluding transportation, orders fell -1%, which was worse than expected and the sharpest drop in a year.  Core capital goods orders (excluding defense and aircraft) fell -1.8%, taken as a bad sign for business investment in new plant capacity.

On Monday, both Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, and San Francisco Fed President John Williams asserted that the United States was experiencing growth and emerging signs of inflation – two stated prerequisites for more rate hikes – and therefore, they said, a rate hike is possible at either of the Fed’s next two policy meetings.

In international economic news, Toronto Dominion’s (TD) Economics’ Quarterly Economic Forecast for Canada stated that the Canadian economy has been through a bit of a rough ride over the past year, but 2016 will likely see the country return to growth.  Real GDP is forecast to grow +1.9% in 2016 and +2.0% in 2017.  This is the first time TD has increased its growth forecast in a year.

Germany’s economic advisors revised down their 2016 growth forecast, saying global economic uncertainties will weigh down trade.  The advisors said they expect Europe’s largest economy to grow by just +1.5% this year, down 0.1% from the previous forecast.

In France, the budget deficit narrowed last year, but unemployment hit a new record high, spotlighting the patchy recovery of the Eurozone’s second-largest economy.  French Finance Minister Michel Sapin said the deficit was 3.5% of gross domestic product in 2015, better than the 3.8% expected, and he expects growth to accelerate this year to +1.5% from +1.2% last year.  But the continuing problem with high unemployment weighs on the economy.  The number of French job seekers rose an additional +1% last month, keeping the stubbornly high unemployment rate at 10% or more of the workforce.

In China, Premier Li Keqiang said Beijing will reduce the tax burden on Chinese companies to spur dynamism and help the economy’s desired shift toward consumption and services and away from their over-dependence on manufacturing.  In a speech this past week, Mr. Li stated that the government will push ahead with tax cuts, particularly focusing on helping promising service industries, including those involved in research and development.  He said such tax cuts will amount to 500 billion yuan ($76.8 billion) this year.

Finally, frequent references are made in this weekly report to Markit’s Purchasing Managers Index (PMI) reports.  The reason is that the PMI reports are quite highly correlated to – and frequently lead – the changes in health of the economies being reported on.

Here is a chart showing the very high correlation between PMI levels and US Gross Domestic Product (GDP) quarter-over-quarter changes.  The upshot is that the PMI reports are very much worth the attention we pay them – and also that current PMI levels may portend worsening US GDP:

  Source: Markit

Chris Williamson, Chief Economist for Markit, writes that the U.S. economy is going through its worst growth spell for three and a half years.  Both the national manufacturing and services PMI indexes had fallen to the stagnation level of 50 in February and improved only slightly in March to 51.1, according to Markit’s early “flash” readings.  Williamson notes that the improved 51.1 reading was still “the third-lowest reading seen since the global financial crisis.”

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

The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market.  The average ranking of Defensive SHUT sectors fell to 12.3 from the prior week’s 11, while the average ranking of Offensive DIME sectors fell to 9.8 from the prior week’s 9.3.  The Offensive DIME sectors are now ranked higher than and have taken the lead from 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.

Sincerely,

FBIAS™ Fact-Based Investment Allocation Strategies for the week ending 3/18/2016

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 graph below for the 100-year view of Secular Bulls and Bears.

Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best.   The CAPE is at 25.90, up from the prior week’s 25.56, after having earlier reached the level also reached at the pre-crash high in October, 2007.  Since 1881, the average annual return for all ten year periods that began with a CAPE around this level have been just 3%/yr (see graph below).

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

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate.  The U.S. Bull-Bear Indicator (see graph below) turned negative on January 15th, and remains in Cyclical Bear territory at 50.87 up from the prior week’s 48.00.

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) turned positive on January 26th.  The indicator ended the week at 36 (the maximum value possible), unchanged from the prior week.  Separately, the quarter-by-quarter indicator – based on domestic and international stock trend status at the start of each quarter – gave a negative indication on the first day of January for the prospects for the first quarter of 2016.

Timeframe summary:

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

In the markets:

Large-caps moved back into positive territory for 2016 as stocks scored a fifth consecutive week of gains.  The major indexes all remain substantially below their record highs set last summer, but only the small-cap Russell 2000 index ended the week still in correction territory—commonly defined as a decline of -10% or more from a recent high.  For the week, the Dow Jones Industrial Average tacked on an additional +389 points to close at 17,602, up +2.26%.  The LargeCap S&P 500 gained +1.35%, the MidCap S&P 400 added +1.61%, and the SmallCap Russell 2000 rose +1.3%.  Both the Dow Transports and Utilities were positive for the week as well, up +4.97% and +1.76%, respectively.

In international markets, Canada’s TSX declined slightly down -0.18%.  In Asia, the big winner was China’s Shanghai Stock Exchange which rallied +5.15%.  Hong Kong’s Hang Seng was also a good gainer at +2.34%, but Japan’s Nikkei declined -1.26%.  Europe experienced a mixed week; the United Kingdom’s FTSE was up +0.81%, Germany’s DAX gained +1.22%, and the Netherlands Amsterdam Exchange rose +0.69%, but France’s CAC 40 declined -0.67% and Italy’s Milan FTSE was off -1.98%.

In commodities, the industrial metal copper continued its recent rebound, closing the week up +2.24%.  Precious metals were also positive as Gold added $4.90 (+0.39%) to close at $1,256 an ounce.  Silver, often the more volatile of the two, rose 2.03% to $15.82 an ounce.  Oil continued its impressive rally, adding an additional +$2.64 to close the week at $41.13 a barrel for West Texas Intermediate crude oil—a gain of +6.86%.

In U.S. economic news, initial claims for jobless benefits rose 7000 to 265,000 last week, a smaller than expected rise from the prior week’s five month low.  The smoothed four week average of claims rose 750 to 268,000 as claims remained below the 300,000 level for 54 weeks, the longest stretch since 1973.

It may be too early to call it a correlation quite yet, but among states where the minimum wage rose at least $.50 per hour, seven out of eight lost jobs in January according to the Labor Department.  Arkansas stood out in its region of the country by hiking its wage $.50 to $8.25 an hour.  It suffered the biggest job losses among those states imposing wage hikes– it reported a loss of 5,100 jobs, and the average workweek there declined to 33.7 hours, down -1.1 hours from a year earlier.

U.S. housing starts rose +5.2% to an annual rate of 1.178 million units, according to the Commerce Department.  The gain was after two consecutive months of declines.  Single-family home starts jumped +7.2% to their best levels since before the recession.

Consumer prices fell in February, but underlying inflation trends remain intact, the Labor Department reported.  The consumer price index declined -0.2% in February as energy costs plunged the most in seven years.  But core prices, which exclude food and energy, rose +0.3% for a second straight month.  Year-over-year, core CPI climbed to 2.3%, the highest in nearly 4 years and slightly above the 2% Fed target inflation rate.  Service costs are behind the increase in inflation, with the services ex-energy inflation rate coming in at over 3% – the most in more than seven years.  Services prices, by their nature, are less exposed to commodities swings and international competition.

U.S. retail sales declined -0.1% in February, matching expectations, but concerns were raised by the January sales number which was revised sharply lower.  Instead of the +0.2% gain initially reported for January, the Commerce Department now states that sales sank -0.4%.  Two major sub readings also got sharp downward revisions for January.  Retail sales excluding autos were revised down by a half point to a -0.4% decline.  Sales ex-autos and gasoline were also revised down a half point to a -0.1% decline.  For February, retail sales ex-autos improved to a 0.1%.  After the release of the disappointing January numbers, economists at Barclays downgraded their outlook for US GDP in the first quarter to 1.9% growth from 2.4%.  On a more positive note, core retail sales (ex-autos, gas, food services, and building materials) grew +0.3% in February, the 3rd increase in 4 months and up 4.3% from a year earlier.

Despite the bad news in the retail sector, the manufacturing sector got good news from the New York Federal Reserve’s Empire State manufacturing index, which rose +17 points to 0.62 – the first positive reading since last July.  New orders and shipments both increased while employment held steady.  In Philadelphia, the Federal Reserve reported its index of mid-Atlantic manufacturing rose to 12.4 from -2.8 in February, the first positive reading in seven months.  In that report, the new orders index jumped 21 points to 15.7.  The employment gauge for the Mid-Atlantic area rose 4 points, but still remained negative at -1.1.

Consumer sentiment unexpectedly declined for a third straight month in March according to the latest University of Michigan consumer survey.  The index’s flash reading was 90, down -1.7 points from February’s final reading.  It’s the lowest reading since last October and analysts had expected a reading of 92.2.  The survey measures consumers’ attitudes toward current economic conditions and their future expectations. 

This past week, the Federal Reserve held its key interest rate steady and signaled that it’s willing to meet markets halfway.  Instead of the four rate hikes this year that Fed policymakers had signaled in December, they now see two quarter-point hikes.  Relief that the pause in rate hikes may extend for another six months helped boost major stock indexes.  In contrast, the January Fed meeting minutes released this week (now almost 2 months out of date), showed that one Fed member anticipated a single rate hike this year, nine predicted two hikes and seven predicted three or more hikes.

In Europe, Eurostats, the EU’s statistical arm reported industrial production in the Eurozone in January was up a solid +2.1% over December, the best reading in six years.  Construction spending rose +3.6%.  Inflation in the euro area came in at -0.2% annualized vs. a 0.3% rate in January as Germany, France, Italy, and Spain were all negative. 

In Asia, Chinese property prices in the top cities soared as much as +57% in the trailing year thru February, according to the National Bureau of Statistics.  Nationally, all prices rose at an average annual rate of +2.8%, the biggest one-month rise since June 2014 according to a review of government data by the Financial Times.  Separately, Central Bank governor Zhou Xiaochuan stated that China would not rely as heavily on exports for economic growth this year since their contribution to the economy has been dwindling. 

In Japan, the Bank of Japan left monetary policies unchanged after cutting interest rates into negative territory in January.  Japanese department store sales improved in February from year-ago levels.  Sales rose 0.2% year-over-year in February, up from -1.9% in January.

Finally, analysts looking at the US stock market gyrations this year – a big downdraft followed by an offsetting rip higher – have begun to point to a factor that seems to neatly explain it all: the dollar.  Binky Chadha, Chief Global Strategist at Deutsche Bank, told marketwatch.com: “A lot of the market convulsions looked like they were coming from independent things.  But they all had a common denominator and that’s the dollar.”  Furthering this dollar-centric view, rumors are now circulating that finance ministers and central bankers at the late-February G-20 meeting in Shanghai settled on a so-called “Shanghai Accord” to weaken the dollar and thereby calm the financial markets.  Although there is nothing official to back up this suspicion, what is undisputed is that the dollar has declined more than -3% since the G-20 gathering and that has coincided with a near-vertical rally in stocks, emerging market assets, and commodities (including oil).  A weaker dollar has also been noted as a key reason in the 54% rally in U.S. crude and a 40% rally in Brent crude.  The chart below shows the drop in the Dollar Index from almost 100 to less than 95, which is also below the dollar’s important 200-day moving average, with the biggest part of that drop coming after the Shanghai G-20 meeting.

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

The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market.  The average ranking of Defensive SHUT sectors fell to 11 from the prior week’s 9.8, while the average ranking of Offensive DIME sectors rose to 9.3 from the prior week’s 10.8.  The Offensive DIME sectors are now ranked higher than and have taken the lead from the Defensive SHUT sectors.   Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

Summary:

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

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

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

Sincerely,

FBIAS™ Fact-Based Investment Allocation Strategies for the week ending 3/11/2016

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 graph below for the 100-year view of Secular Bulls and Bears.

Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best.   The CAPE is at 25.56, up from the prior week’s 25.28, after having earlier reached the level also reached at the pre-crash high in October, 2007.  Since 1881, the average annual returns for all ten year periods that began with a CAPE around this level have been just 3%/yr (see graph below).

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

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate.  The U.S. Bull-Bear Indicator (see graph below) turned negative on January 15th, and remains in Cyclical Bear territory at 48.00 up from the prior week’s 46.13.

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) turned positive on January 26th.  The indicator ended the week at 36 (the maximum value possible), up from the prior week’s 33.  Separately, the quarter-by-quarter indicator – based on domestic and international stock trend status at the start of each quarter – gave a negative indication on the first day of January for the prospects for the first quarter of 2016.

Timeframe summary:

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

In the markets:

This past Wednesday, March 9th, was the 7th anniversary of the stock market low in the depths of the financial crisis.  The bull market of the last 7 years has been showing distinct signs of aging, but the rally of the last 4 weeks (which has been in lockstep with oil) has given hope to many that the old bull will live on.  In any event, it was a positive week for US indices.  The Dow Jones Industrial Average tacked on an additional 206 points, up +1.21%.  The large cap S&P 500 cleared the 2000-level and gained +1.11%.  MidCaps and SmallCaps also participated in the rally as the S&P 400 and Russell 2000 were up +0.57% and +0.52%, respectively.  Utilities, traditionally a “defensive” sector, nonetheless rallied +2.23% and Transports were up +0.54%.

In international markets, Canada’s TSX gained +2.34% on strength in the oil sector.  In Europe, after large see-saw reactions to ECB pronouncements on Thursday and Friday, France’s CAC 40 index rose +0.81%, Germany’s DAX ended the week near unchanged up +0.07%, and Italy’s Milan FTSE index rallied +3.88%.  Among the relatively few international losers, the United Kingdom’s FTSE ended down -0.96%, China’s Shanghai stock exchange declined 2.22% and Japan’s Nikkei lost 0.45%. 

In commodities, oil – bringing stocks along with it – managed to rally for a fourth straight week, up an additional +5.95% to $38.49 a barrel.  Precious metals retreated slightly, with Gold declining -$9 to $1251.10 an ounce and silver also closed down -0.23% at $15.51.

In U.S. economic news, jobless claims continued the optimistic tone from the previous week, falling by 18,000 to 259,000.  The smoothed 4-week average fell to 267,500 from 270,000.  Continuing claims were 2.225 million, a decrease of 32,000 from the prior week.  Weekly initial claims are at the lower end of the 250,000 to 300,000 range that has been in place since July of 2014.

In housing, mortgage applications showed a slight uptick in home buying demand as total mortgage applications rose +0.2%, according to the Mortgage Bankers Association.  The purchase index rose +4.2% for the week last week and was up a strong +30% compared to the year earlier.  Demand for refinancing declined 2.3% last week, but remained +13% higher than a year earlier.  The average interest rate for 30-year conforming loans climbed +6 basis points (100ths of a %) to 3.89%.

The closely-watched “rig count” continues to decline as oil drilling rigs in three of the nation’s most prominent shale formations continued to shut down in the wake of announcements from some of the major energy companies of plans to scale back operations.  The rig count in the Eagle Ford formation in South Texas fell by one to a total of 40 for the week ended March 4.  Permian Basin rigs, located in West Texas and southeastern New Mexico, declined by six to 156, while the Williston basin, located in eastern Montana, southern Canada and the Dakotas, saw rigs fall by three to 33.

Consumer credit growth surprisingly slowed – and sharply – in January as consumers cut back on credit card use, according to the Federal Reserve.  Overall consumer credit increased just +3.6% in January, whereas December had seen a gain of +7.3%.  This is the weakest percentage increase since March of 2013.  Credit card borrowing declined -1.4% in January following average gains of +7.5% over the past 2 months, the first decline since early last year.  Economists often view credit card use as a proxy for consumer confidence.  Non-revolving consumer credit, which includes auto and student loans, grew a smallish +5.4% in January after a +7.4% gain in December.

The Commerce Department reported that wholesale inventories rose in January as sales fell, suggesting that efforts by businesses to reduce inventory overhang could last through the year.  Inventories rose +0.3% to a seasonally adjusted $584.2 billion.  The inventory-to-sales ratio rose 0.3% to 1.35:1 in January, the highest ratio since April 2009.  The time it takes to unwind wholesale inventories rose to the highest level since the recession.  A rising ratio can have positive or negative implications.  It could mean companies stocking up in advance of a pickup in sales growth — or it could mean an inability to sell goods.  The highest ratio is in machinery, where sales have dropped -1.4% over the trailing 12 months.

Small business optimism fell to a two-year low in February, according to the National Federation of Independent Business (NFIB).  Owners of small firms reported hiring and compensation plans weakening sharply since the end of last year—an indication that labor markets might not be as healthy as official government data indicates.  NFIB’s sentiment gauge fell one point to 92.9, the lowest since early 2014 and well below historical norms.  NFIB Chief Economist William Dunkelberg stated, “A ho-hum outcome this month confirms that the small business sector is not performing with any strength.”  A net 21% still see the economy weakening, the worst since late 2013.  Small firms have reported falling sales since June 2012.  A big shift so far this year in the NFIB survey is in labor outlook, with only 10% of small businesses planning to add staff, down from 11% in January and 15% in December.  This is the lowest labor outlook since last June.

In Canada, the dark clouds that hung over the Canadian economy are beginning to clear.  Exports are rebounding, fear of a global recession is abating, and the price of oil has rebounded strongly.  The federal government is also expected to inject a potent dose of fiscal stimulus in its March 22 budget to help the sluggish economy.  As a result, the central bank decided to keep its overnight interest rate unchanged at 0.5%.  “The global economy is progressing largely as the bank anticipated in its January Monetary Policy Report,” the bank said in a statement accompanying the rate announcement.

In Europe, the European Central Bank (ECB) was determined not to disappoint markets and announced a multi-faceted stimulus plan.  On Thursday, the ECB cut the overnight lending rate to zero from 0.5%, cut the interest rate on bank reserves stored at the central bank further into negative territory (from -0.3% to -0.4%), and increased by one third its monthly asset purchases (from $66 billion to $88 billion).  The ECB expanded its asset purchases to include investment-grade corporate bonds, as well as sovereign government debt.  Finally, the ECB announced it would originate long-term loans to European banks that will let them borrow for four years at rates between 0% and -0.4% (in effect paying banks to borrow as an incentive to increase lending).  At first, the positive stimulus effect seemed to be short-lived as the euro strengthened and stocks dove to the downside, but investors had reconsidered by Friday and drove European markets much higher on Friday.  Germany’s DAX, for example, was down -2.2% on Thursday, but up +3.5% on Friday.

In Germany, the German banking association (BdB) said that the German economy will likely grow at a slightly slower pace this year, citing a slowdown in China and other emerging markets.  The BdB said it expects Europe’s largest economy to grow by 1.6% this year, down 0.1% from last year.  BdB chief Michael Kemmer stated “Globally, we are witnessing an unusual bundle of risks.”

In the United Kingdom, the British Chamber of Commerce predicted a lower rate of domestic growth in 2016 and 2017, up +2.2% and +2.3%, respectively.  The revisions are down slightly from forecasts it had made in December.  Adam Marshall, acting Director-General said the U.K.’s economy is being hurt by weaker global growth.

In Asia, Japan’s fourth-quarter GDP growth was revised higher on Tuesday to a still-negative -1.1% from the 1.4% annualized pace reported last month.  Japan’s economy has contracted two of the past 3 quarters.  Consumer sentiment plunged as consumer confidence fell to 40.1 from 42.5, well below the 42.2 forecast.  This was the steepest decline in Japanese consumer sentiment since October 2013. 

In China, a worse-than-expected monthly trade report on Tuesday was the latest sign of China’s struggling growth.  February exports plunged nearly -25% from a year ago, the biggest monthly drop in more than 6 years.  China’s trade surplus narrowed sharply as imports also posted a double-digit drop.

Finally, as the bull market enters its 7th year, a troubling case of Déjà Vu has emerged in the tech sector, which is flashing a warning last seen during the “dot com” bubble era.  According to Credit Suisse’s Eugene Klerk, the share of IPOs in the U.S. that are losing money in their ongoing operations is now greater than 70% and almost back to the peak last seen during the “dot com” years.  Klerk writes, with considerable understatement, “All else being equal, these companies represent greater earnings and cash flow risk than seasoned, more established companies.”  To which one might reply, “Well, duh!”

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

The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market.  The average ranking of Defensive SHUT sectors fell to 9.8 from the prior week’s 8.5, while the average ranking of Offensive DIME sectors rose slightly to 10.8 from the prior week’s 11.  The Defensive SHUT sectors continued to lead the Offensive DIME sectors, but by a very small margin.   Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

Summary:

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

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

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

Sincerely,

FBAIS™ Fact-Based Investment Allocation Strategies for the week ending 3/4/2016

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 graph below for the 100-year view of Secular Bulls and Bears.

Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best.   The CAPE is at 25.28, up from the prior week’s 24.62, after having earlier reached the level also reached at the pre-crash high in October, 2007.  Since 1881, the average annual returns for all ten year periods that began with a CAPE around this level have been just 3%/yr (see graph below).

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

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate.  The U.S. Bull-Bear Indicator (see graph below) turned negative on January 15th, and remains in Cyclical Bear territory at 46.13 up from the prior week’s 43.75.

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) turned positive on January 26th.  The indicator ended the week at 33, up from the prior week’s 27.  Separately, the quarter-by-quarter indicator – based on domestic and international stock trend status at the start of each quarter – gave a negative indication on the first day of January for the prospects for the first quarter of 2016.

Timeframe summary:

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

In the markets:

Stocks recorded a third consecutive week of strong gains.  All major indexes were up more than +2% and the LargeCap index is close to erasing its losses for the year to date.  The Dow Jones Industrial Average rose +366 points to end the week at 17,006.  The LargeCap S&P 500 gained +2.67% and closed just shy of the 2,000 level.  MidCaps and SmallCaps rallied even more strongly, up +4.4% and +4.3% respectively, as investors appeared to focus on stocks that had suffered the steepest declines in recent months – and traders who were “short” those stocks scrambled frantically to cover their downside bets (this is called a “short squeeze”).  The rally was broad-based as Transports rallied +3.3% and even “defensive” Utilities were up +2.26%.  The NASDAQ 100 index rose +2.2% for the week, while the broader NASDAQ Composite gained +2.76% to close at 4,717.  Many U.S. market indexes are now down just a couple of percent for the year.  The Dow Jones Industrial Average is down -2.4%, the S&P 500 is down -2.15%, and the S&P 400 midcap index is down just -0.34%.  But Tech stocks and SmallCaps have had a more difficult time as the NASDAQ is still down -5.8%, and the SmallCap Russell 2000 is still down -5.04%. 

In international markets, Canada’s TSX joined the rally in oil and added +3.24%.  In South America, Brazil’s Bovespa stock index surged +18% after police detained former president Luiz Inacio Lula da Silva as part of a corruption investigation that could ultimately trigger great political change in the country, according to analysts.  In Europe, the United Kingdom’s FTSE was up +1.7%, Germany’s DAX gained +3.27%, and France’s CAC 40 added +3.29%.  In Asia, Singapore rallied over +7%, Japan’s Nikkei rose +5.1%, and China’s Shanghai index gained +3.86%.  Thanks largely to Brazil, the Emerging Markets index took the “index with the biggest gain” trophy for the week, at +9.2%.

In commodities, the big news was in oil as it tacked on another +10%, up $3.49 to $36.33 per barrel of West Texas Intermediate crude oil.  Industrial metal copper rallied +6.7%, as did precious metals.  An ounce of silver rose +5.9% to $15.55 an ounce, and gold gained over +$37, ending the week at $1,260 an ounce, an upmove of +3.05%. 

The month of February, if you were to look at just the monthly price change data, must have been very dull in most markets.  In truth, it was anything but, as February saw a deep dive in the first half, and a very strong rally in the second half.  The fact that most indexes closed the month with relatively little change masked very large intra-month moves.  The Dow Industrials finished with just a +0.30% change for February, and the S&P just moved 0.41%.  The best U.S. index for February was the MidCap 400 index, which rose +1.25%, and the worst was the NASDAQ Composite at -1.21%.  Developed International sank -3.33% for February, but Canada’s TSX rose +0.30%.

In U.S. economic news, the Labor Department reported the U.S. economy added +242,000 jobs last month solidly beating expectations of +190,000.  The unemployment rate remained at 4.9%.  The strong jobs number, along with an upward revision to January’s gain to 172,000 eased concerns of many that the financial market plunge in the beginning of the year might have had a serious effect on the overall economy.  The labor force participation rate rose +0.2 point to 62.9% continuing its lift-off from multi-decade lows but still far below pre-recession levels.  One of the flies in the jobs ointment, however, was the continuing stagnation in manufacturing employment, while services provided the bulk of employment gains.

The private-employer survey from payroll processing firm ADP reached similar conclusions about the private economy.  Private employers added 213,800 jobs in February, up from 193,400 in January, reported ADP.  The services sector accounted for virtually all of the gains; employment in manufacturing declined.  The services sector added 208,500 jobs up +20% from January’s downwardly revised 174,400.  But manufacturing lost 8,900 jobs, up just +0.1% from a year earlier—the smallest year-over-year gain in more than 5 years.

In housing, pending home sales unexpectedly dropped -2.5% in January, according to the National Association of Realtors (NAR).  Economists had expected a half percent gain last month.  Lawrence Yun, chief economist for NAR stated that inclement weather likely impacted Northeast sales, but accelerating home prices and limited inventory appeared to be the main impediments to would-be buyers.  Pending sales were up +1.4% compared with this time last year. 

Manufacturing remained in contraction according to the Institute of Supply Management (ISM) manufacturing index, which came in at 49.5 (below 50 is contraction).  However, this was an improvement over last month’s reading of 48.2 and beat expectations by +1.5 points.  U.S. manufacturers have been hurt by a strong U.S. dollar and weak global demand.  On a positive note, while the headline number is still below the neutral 50 level, new orders and production both expanded at the fastest pace in 6 months.  

ISM’s Non-Manufacturing Index fell for the fourth straight month to a two-year low last month, signaling slower growth and a small probable decline in jobs.  The services-sector gauge for February declined -0.1 point to 53.4, beating expectations by 0.3 points, but the lowest reading since February of 2014.

In Europe, the European Central Bank meets on Thursday, March 10, and is expected to cut the deposit rate even further into negative territory.  Analysts are concerned that financial markets may be expecting more aggressive stimulus such as quantitative easing and may be disappointed. 

The Eurozone PMI for manufacturing was 51.2, down from 52.3 last month but still in expansion territory.  The service reading was 53.3, down -0.3 from the prior month.  Eurostat’s flash reading on Eurozone inflation for February was -0.2% annualized, down from +0.3% and largely due to falling energy prices.  The volume of retail trade was up +0.4% in January.  Eurozone unemployment was at 10.3% in January, the lowest in over 4 years, but more than twice that of the US.  Individually, Germany’s was the lowest at 4.3%, France was at 10.2%, Italy at 10.5%, and Spain was at 20.5%.

In Asia, Moody’s Investors Services cut China’s government credit ratings to negative from stable, citing rising government debts, declining foreign reserves and doubts about authorities having the “capacity to implement reforms”.  Perversely, China’s Shanghai stock market index greeted the downgrade with a +4.3% rally on Wednesday.

China’s manufacturing PMI was just 49.0 last month, the worst since January of 2009.  Services declined -0.8 point to 52.7.  On Monday, the Chinese government reported that a total of 1.8 million workers in China’s coal and steel sectors are expected to lose their jobs as part of China’s efforts to reduce industrial overcapacity.

In Japan, the February PMI for manufacturing was 50.1 down 2.2 points.  The services reading was 51.2, down -1.2 points.  In a milestone event, the Japanese government sold 10-year bonds with a negative yield of -0.024% for the first time ever. 

Finally, to say 2016 has been an interesting year in the financial markets would be an understatement.  The year began with the most substantial market rout in years, raising serious concerns that another Bear market plunge perhaps as serious as the financial crisis of 2008 may be upon us.  However, the last 3 weeks has seen a significant rally that has brought most of the major indexes back to just modestly lower for the year.

So, is this would-be Bear Market already over? 

Oh, if only it were that easy!

Morgan Stanley’s Andrew Sheet points out that “Bear market corrections (i.e., rallies) have typically lasted about 35 days for the S&P 500, with the markets moving up an average 14% from local trough before the sell-off resumes.”

As of this writing, the S&P 500 has rallied 15 market days from its low on February 11.  Stay tuned.

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

The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market.  The average ranking of Defensive SHUT sectors fell to 8.5 from the prior week’s 7.8, while the average ranking of Offensive DIME sectors fell to 11 from the prior week’s 10.8.  The Defensive SHUT sectors continued to lead the Offensive DIME sectors, but by a smaller margin.   Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

Summary:

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

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

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

Sincerely,

FBIAS™ Fact-Based Investment Allocation Strategies for the week ending 2/26/2016

The very big picture:

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

Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best.   The CAPE is at 24.62, up from the prior week’s 24.24, after having earlier reached the level also reached at the pre-crash high in October, 2007.  Since 1881, the average annual returns for all ten year periods that began with a CAPE around this level have been just 3%/yr (see graph below).

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

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate.  The U.S. Bull-Bear Indicator (see graph below) turned negative on January 15th, and remains in Cyclical Bear territory at 43.75 up from the prior week’s 40.78.

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) turned positive on January 26th.  The indicator ended the week at 27, up sharply from the prior week’s 19.  Separately, the quarter-by-quarter indicator – based on domestic and international stock trend status at the start of each quarter – gave a negative indication on the first day of January for the prospects for the first quarter of 2016.

Timeframe summary:

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

In the markets:

All major U.S. indices were green as the stock market was able to manage a second consecutive weekly advance. The LargeCap S&P 500 climbed +1.6%, extending its two-week rally to +4.5% and is now up +0.4% for the month.  The Dow Jones Industrial Average gained 247 points to end the week at 16,639, up +1.5%.  MidCaps and SmallCaps also fared well as the S&P 400 MidCap index rose +2.7% and the SmallCap Russell 2000 index also gained 2.7%.  The defensive Dow Jones Utilities barely managed a positive close, up just +0.07%, while the Dow Jones Transports added +1.63%.

In international markets, Canada’s TSX was essentially flat, down just -0.12%.  European markets were generally higher for the week in the +1.2 to +2.5% range, while major Asian markets were mixed, with the biggest loser being the China Shanghai Index, down -3.25%.  Developed markets as a whole were flat for the week, and Emerging markets were down -0.6% on average for the week.

In commodities, crude oil surged more than +10%, up +$3.12 to $32.84 on news of supply disruptions in Iraq and Nigeria.  Precious metals lost their upward momentum as Gold ended the week at $1222.80 an ounce, down 0.31%, and silver plunged more than -4.3% to $14.69 an ounce.

In U.S. economic news, GDP for the fourth quarter was revised upward to +1.0% growth by the Commerce Department, better than the +0.7% gain initially reported.  For the year, the economy grew a very modest +2.4%, the same as in 2014.  The report was a surprise to Wall Street, which had expected a downward revision.  However on a not-so-positive note, the report reveals that the boost in growth resulted from a smaller decline in inventories and weaker imports.

New claims for jobless benefits rose 10,000 to 272,000 last week, according to the Labor Department.  Continuing claims decreased 19,000 to 2.253 million.  Despite the latest increase weekly initial claims remain in the lower half of the 250,000 to 300,000 range they have been in for 19 months.

The National Association of Realtors reported that existing home sales rose in January to an annualized 5.47 million rate, a six month high.  Home sales were up +11% from a year ago, the biggest annual gain since July, 2013.  Sales were up +0.4% from last month.  Nationally, the median home price rose +8.2% from a year ago, the largest since last spring.  The S&P/Case-Shiller index showed year-over-year price gains of +5.7% in December, in its 20-city index.  But new-home sales fell in January to a seasonally adjusted rate of 494,000 housing units, according to the Commerce Department.  This was a bigger decline than economists had expected.  New home sales fell -5.2% compared with a year earlier and are down -9.2% from December’s rate.  The median sales price for new homes was $278,800, while the average sales price was $365,700.  The median price is down -4.5% versus a year earlier, the biggest year-over-year decline since January 2012.  The seasonally adjusted inventory of new homes for sale was 238,000, representing a supply of almost 6 months at the current rate.

The Conference Board reported that consumer confidence fell -5.6 points to 92.2, missing forecasts by a wide margin.  It was the lowest reading since last summer.  Analysts suggest that recent market weakness and slowing job growth were behind the reading.  In the report, the “present situation” sub-index declined -4.5 points to 112.1.  Respondents who stated current business conditions were good decreased to 26%, while those describing current business conditions as bad rose to 19.8%.  The 6.2% spread between the two was the smallest since last August.  The expectations gauge sank -6.4 points to 78.9, a two year low.  Only 12.2% of consumers expect more jobs in the future versus 17.2% who expect fewer jobs.  Nonetheless, Lynn Franco, Director of Economic Indicators at The Conference Board, stated “continued turmoil in the financial markets may be rattling consumers, but their assessment of current conditions suggests the economy will continue to expand at a moderate pace in the near term.”

Consumer spending – the backbone of the U.S. economy – remains strong, rising +0.5% in January and beating analyst forecasts according to the Commerce Department.  Personal income also beat projections rising +0.5%.  The Federal Reserve’s favorite inflation gauge, the core personal consumption expenditures index, rose +0.3%, which was the biggest monthly gain in four years.  The +1.7% annual gain for the personal consumption expenditures index was the most since July 2014, and nearing the Fed’s stated 2% target.

Good news for manufacturing has been rare in recent months.  We got some this week, in the form of orders for durable goods, which jumped +4.9% last month – the most in ten months and handily beating forecasts.  Economists had been expecting a +2% gain.  Year-over-year, durable goods orders rose a less-robust +0.6%. 

In international economic news, the Conference Board of Canada predicts little economic growth over the coming years for Canada.  The report states that the global downturn in mineral prices has hit the Canadian economy particularly hard and it will be years before the territories regain their financial footing. 

In the Eurozone, the president of Germany’s Bundesbank gave a positive outlook for the global economy on Wednesday, but stated that “central banks shouldn’t be overburdened with creating economic growth.”  “The global recovery is on track,” he added.  His cheerleading speech followed a report Tuesday that showed German exports dropped -0.6% in the fourth quarter for the first time since 2012.  Business sentiment in Germany fell to the lowest level in more than a year.

In France, French Finance Minister Michel Sapin stated that the global economy faced a series of difficulties but described them as “surmountable”, and warned against investor overreaction – and against the UK exiting the European Union.

In Asia, a long-standing issue facing the world’s third-largest economy – Japan – has finally manifested itself in a visible way.  The official population of Japan as of Oct. 1 is 127.1 million, which is down by 947,000 or -0.75% from the previous census in 2010; this is the first-ever decline since the census started in 1920.  Even during World War II the population rose.  A UN report last year projected that Japan’s population would fall to about 83 million by 2100.  The average number of children a Japanese woman will bear in a lifetime – just 1.42 as of 2014 – is far below the replacement rate of 2.1.  It doesn’t help that Japan keeps a tight lid on immigration, which business leaders are calling to be loosened, but Prime Minister Shinzo Abe is showing no signs of changing existing policy.

The Japanese census figures are likely to further Japan’s decades-long stagnation.  From a government standpoint, further stimulus packages are likely.  The declining Japanese population is particularly visible in many rural prefectures.  While Tokyo’s population grew +2.7% from 2010 to 2015, the population in 39 of Japan’s 47 prefectures declined.

Finally, Rob Arnott, the widely-followed financial guru and chairman of investing firm Research Affiliates, recently put out a rather striking research note exhorting investors to “dump quality stocks and buy value stocks”.  He states that stocks that bear high-quality characteristics such as high profits, and strong balance sheets have now become too expensive in relation to the rest of the stock market.  Meanwhile, value stocks, which traditionally mean boring companies with low future growth prospects but still cheap in relation to profits and dividends, are, according to Arnott, trading at a significant discount to historical norms.  Arnott’s call is interesting given the fact that he is the best-known and one of the earliest proponents of “smart beta” investing, which targets known anomalies in market returns that favor low volatility, high quality, and higher momentum stocks, among other characteristics.  So why did he put out the “sell quality” call?  Perhaps because his proselytizing in favor of high quality has been too successful leading to too many buyers in this now-overcrowded space, and inviting a reversion to the mean.

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

The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market.  The average ranking of Defensive SHUT sectors rose to 8.0 from the prior week’s 8.8, while the average ranking of Offensive DIME sectors rose to 10.8 from the prior week’s 11.8.  The Defensive SHUT sectors continued to lead the Offensive DIME sectors.   Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

Summary:

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

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

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

Sincerely,

Dave Anthony, CFP®, RMA®

FBIAS™ Fact Based Investment Allocation Strategies for the week ending 2/19/2016

The very big picture:

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

Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best.   The CAPE is at 24.24, up from the prior week’s 23.61, after having earlier reached the level also reached at the pre-crash high in October, 2007.  Since 1881, the average annual returns for all ten year periods that began with a CAPE around this level have been just 3%/yr (see graph below).

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

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate.  The U.S. Bull-Bear Indicator (see graph below) turned negative on January 15th, and remains in Cyclical Bear territory at 40.78, up from the prior week’s 39.24.

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) turned positive on January 26th.  The indicator ended the week at 19, up sharply from the prior week’s 8.  Separately, the quarter-by-quarter indicator – based on domestic and international stock trend status at the start of each quarter – gave a negative indication on the first day of January for the prospects for the first quarter of 2016.

Timeframe summary:

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

In the markets:

Stocks bounced back from 2 weeks of losses with the S&P 500 managing strong gains the first 2 trading days of the holiday-shortened week.  All major indexes were in the green with the Dow Jones Industrial Average rising 418 points to 16,391, up +2.6%.  SmallCaps and MidCaps outperformed LargeCaps, as did technology. The LargeCap S&P 500 index rose +2.85%, the MidCap S&P 400 gained +3.47%, the SmallCap Russell 2000 surged +3.9%, and the tech-heavy Nasdaq 100 advanced +3.6%. 

In international markets, Canada’s TSX rose +3.49% with the help of strong gains in the important energy sector.  Major European and Asian markets were strong across the board, too, as the United Kingdom’s FTSE 100 surged +4.25%, Germany’s DAX jumped +4.69%, and France’s CAC 40 rallied +5.7%.  In Asia, China’s Shanghai Stock Exchange rose +3.49%, Japan’s Nikkei surged +6.79%, and Hong Kong’s Hang Seng enjoyed a +5.7% gain.

In commodities, the industrial metal copper gained +2.29%, but precious metals declined slightly as Gold declined $11.90 an ounce to $1,226.60.  Silver, the more volatile of the two, retreated 2.75% to $15.36 an ounce.  Oil had a big week as rumors circulated that Saudi Arabia, Russia, and Venezuela had agreed to freeze oil output and that Iran is also considering joining the effort.  Oil rallied over +10%, up $2.94 to $31.96 a barrel.

In U.S. economic news, initial claims for jobless benefits fell 7,000 to 262,000 last week, the lowest since November and a rate consistent with a healthy job market, according to the Labor Department.  The smoothed four week average fell 8,000 to 273,250.  However, analysts at TrimTabs Investment Research have dug deeper into a different metric, and what they have found is concerning.  The growth of federal income and employment tax withholdings has been dropping at an alarming rate.  For most of last year, tax withholdings had been rising at a rate of +5% versus the year ago period.  Revenue inflows to the Treasury Department began to steadily decline through last fall, bringing the annual growth rate to just below +4% by the beginning of this year.  From the beginning of this year, growth has been just +1.8%, far less than the +5% gains a year ago.  “The slower pace of year over year gains in tax withholdings has pointed to a significantly slower pace of hiring since September,” says TrimTabs Investment Research, which estimates that 820,000 jobs were added from September to January.  In contrast, the Labor Department estimates 1.137 million new jobs were added over that span, or almost 40% more.

The National Association of Home Builders reported single-family home construction starts fell -3.9% in January to an annualized 731,000.  This is an increase of +3.5% versus a year ago.  Multi-family starts were down -2.5% for the month and down -3.8% annualized.  Homebuilder sentiment slipped to a nine month low.  On a positive note, building permits were up +13.5% from year ago.  Single-family permits were down -1.6% last month, but remain +9.6% above year ago levels.

Housing starts fell more than expected in January, declining -3.8% to an annualized 1.099 million, according to the Commerce Department.  Housing permits, an indicator of future building activity, beat expectations by declining only -0.2% to 1.202 million.

The Mortgage Bankers Association reported that the 30 year fixed-rate mortgage stands at just 3.83%, the lowest since last April.

Core U.S. consumer prices, which exclude food and energy, rose +0.3% in January, up +2.2% from year ago.  This is the fastest annual rise since June 2012, according to the Labor Department.  Overall prices were unchanged for the month and up +1.4% from year ago.  Core prices were driven by gains in the cost of medical care, health insurance and housing.  Health insurance costs rose +1.1% for the month and are up +4.8% from year ago, the largest increase in nearly three years.

US-wide industrial production recovered much more strongly than expected in January, up +0.9%, according to the Federal Reserve.  The gain was led by a +5.4% jump in utilities output.  Factory activity returned to growth, up +0.5% after falling the two previous months.  Mining output, which includes oil drilling, was flat last month, and down -9.8% versus a year earlier.

Many regional manufacturing reports continue to be poor, however.  The New York Federal Reserve’s Empire state manufacturing index improved less than expected from January’s worst reading since the Great Recession.  Overall business conditions improved to -16.6 from -19, however this is still the second worst reading since 2009.  New orders and shipments remained firmly in negative territory, suggesting continued contraction.

Likewise, the Philadelphia Fed Manufacturing Index remains in contraction but improved to -2.8 from -3.5.  Shipments increased, but new orders fell 4 points to -5.3.  The employment index fell to -5 from -1.9, the lowest since May 2013.  The inventory gauge fell further, suggesting that manufacturers continue to deplete stocks of goods.  The business outlook index fell to its lowest level since November 2012.

In Canada, the Canadian dollar’s sharp drop over the past year is beginning to stoke inflation.  The consumer price index rose +2% in January from the same time last year, according to Statistics Canada.  It is now at its highest level since November of 2014 and approaching the central bank’s target, and puts the Canadian central bank in a difficult position as it has been attempting to prop up growth with low borrowing costs.

In the Eurozone, an interesting fact came to light last week:  the United States became the top destination for German exports in 2015, the first time since 1961 that the U.S. has held that spot.  Analysts believe that an upturn in the U.S. economy and a weaker euro led to the change.  In France, Christine Lagarde who managed a tumultuous first term as Managing Director of the International Monetary Fund was officially named to a new term at the global emergency lender.  Lagarde’s second five years is not anticipated to be any quieter than her first term.

Finally, much has been written in recent years along the lines of “if this is an expansion, why does it feel like we’re still in a recession?”  Young people and low-wage workers in particular have felt this way.  One answer is that the expansion in the years since the recent recession has been very weak, and nothing like the expansions that have followed many other recessions.

For example, President Ronald Reagan took office in 1981 in the midst of raging inflation and a deep recession.  Similarly, President Barack Obama took office in 2009 in the midst of the recent global financial crisis.  President Reagan’s first 7 years in office averaged +7.9% GDP growth, while President Obama’s first 7 years in office have averaged less than half as much, at +2.9%.  The worst year of GDP growth in Pres. Reagan’s first 7 years, at +4.2%, was greater than the best year of growth under Pres. Obama’s first 7 years, which was +4.1%.  The recovery during President Obama’s tenure has been so comparatively anemic that the “why does it feel like we’re still in a recession” question becomes much more understandable.

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

The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market.  The average ranking of Defensive SHUT sectors fell slightly to 8.8 from the prior week’s 8.5, while the average ranking of Offensive DIME sectors rose to 11.8 from the prior week’s 12.5.  The Defensive SHUT sectors continued to lead the Offensive DIME sectors, but by a much-narrowed margin.   Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

Summary:

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

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

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

Sincerely,

FBIAS™ Fact Based Investment Allocation Strategies for the week ending 2/12/2016

The very big picture:

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

Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best.   The CAPE is at 23.61, down from the prior week’s 23.80, after having earlier reached the level also reached at the pre-crash high in October, 2007.  Since 1881, the average annual returns for all ten year periods that began with a CAPE around this level have been just 3%/yr (see graph below).

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

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate.  The U.S. Bull-Bear Indicator (see graph below) turned negative on January 15th, and remains in Cyclical Bear territory at 39.24, down from the prior week’s 41.15.

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) turned positive on January 26th.  The indicator ended the week at 8, down from the prior week’s 12.  Separately, the quarter-by-quarter indicator – based on domestic and international stock trend status at the start of each quarter – gave a negative indication on the first day of January for the prospects for the first quarter of 2016.

Timeframe summary:

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

In the markets:

A sharp late-week rally wasn’t enough to reverse U.S. market declines for the week as the Dow Jones Industrial Average ended the week down -1.43%, despite a 314 point rally on Friday.   Similarly, the S&P 500 LargeCap index declined -0.81%, the S&P 400 MidCap gave up -1.36%, and the SmallCap Russell 2000 lost -1.38%.  Dow Transports bucked the trend and gained +1.52% but Dow Utilities, the leading year-to-date sector, ended the week down 2.2%.

In international markets, almost all major indices were negative with Japan the biggest loser, plunging -11.1%.  In North America, Canada’s TSX declined -3%.  European markets also had a difficult week as the Netherlands dropped -5.4%, France’s CAC 40 declined -4.89%, Germany’s DAX pulled back -3.43%, and the United Kingdom’s FTSE declined -2.4%. 

In commodities, precious metals shone brightly as Gold gained +$64.40 an ounce to end the week at $1,238.50, up +5.49%.  Silver added +$0.76 to $15.79, up 5.06%.  Crude oil ended the week at $29.02, down -6.39%, despite a huge +10.7% rally on Friday.

In U.S. economic news, initial claims for jobless benefits fell 16,000 last week to 269,000, a bigger decline than expected and the lowest reading this year.  Jobless claims have now remained below 300,000 for almost a year.  Despite financial markets seemingly signaling trouble ahead for the U.S. economy, the labor market remains resilient.  Continuing jobless claims remain near long-term lows of 2.239 million.

The Labor Department’s “Job Openings and Labor Turnover Survey” (JOLTS) report showed openings rose to 5.6 million in December, up 250,000 from November.  Hires climbed to 5.36 million from November’s 5.26 million, the highest reading since the fall of 2004.  The number of people quitting their jobs hit a 10-year high of 3.06 million, up 200,000 from the previous month, indicating a higher level of worker confidence in their ability to find better jobs.

U.S. retail sales rose a better-than-expected +0.2% in January, according to the Commerce Department.  Core sales (ex-autos, restaurants, and building supplies) rose +0.6%.  Non-store retailers such as Amazon outperformed all retail segments with a +1.6% gain, up +8.7% annually. 

Import prices continue to fall, down -1.1% last month, matching the decline seen in December.  Expectations had been for a greater drop.  Year-over-year, import prices declined -6.2%.  Export prices also fell, down -0.8% on the month and down -5.7% from a year ago.

Despite all predictions to the contrary, mortgage rates fell below 4% again and mortgage applications surged +9.3% last week.  Purchase applications were little changed, but refinancing demand hit a one-year high, up +15.8%. 

Small business sentiment fell to its lowest level in nearly 2 years, said the National Federation of Independent Business (NFIB).  NFIB’s small business optimism index fell -1.3 points to 93.9, continuing a downtrend for over a year and the lowest since February of 2014.  In the NFIB report, 21% of small business owners see economic conditions worsening—the lowest business conditions outlook since late 2013.  Despite weaker readings in credit conditions, earnings trends, and sales a net 27% of companies raised compensation—the highest reading since 2007.  A large part of the rise in compensation was due to the minimum wage hikes that took effect in 14 states on January 1st, pushing up labor costs.  The broader labor issue remains that small businesses continue to have difficulty finding qualified candidates.  A full 29% of businesses report having job openings and 45% reported few or no qualified candidates.

New York Federal Reserve President William Dudley said key sectors of the U.S. economy are in good shape and more resilient.  He stated that the financial system is stronger with banks better capitalized and that household balance sheets are in much better shape.  He reiterated Fed Chair Janet Yellen’s statement that economic expansions don’t die of “old age”.

In Canada, the Bank of Canada is selling off most of its remaining gold reserves, mainly by selling gold coins.  The country held just US$19 million worth of gold as of last Monday.  For most of last year, the country’s gold reserves stood at more than US$100 million.

In the Eurozone, the economy grew 0.3% in the 4th quarter—matching forecasters’ views.  Among the larger countries, Spain gained +0.8%, its 2nd significant quarterly gain.  Germany and France rose +0.3%, and Italy managed a +0.1% gain. 

In Germany, industrial production declined, widely missing analyst expectations of a +0.5% gain.  German production fell -2.3%, the worst since October 2012.  Capital goods production declined -2.6%, consumer goods fell -1.4%, and energy-related production decreased by -3%.

Around the world, Central Banks have been using the tools at their disposal to spur economic growth in their respective zones.  The Bank of Japan surprised markets two weeks ago by adopting a negative interest rate on bank funds deposited with the central bank—the idea being that it would get the banks to stop hoarding reserves and force them to put that money to work.  Instead, banks appear to have used the money to purchase Japanese government bonds which remain in such high demand that the 10-year bond yield went negative for the first time this week.  Since then, Japanese bank stocks have plunged -25%. 

European Central Bank President Mario Draghi once more pledged to do “whatever it takes”, and further backed it up with a claim that there are “no limits” to how far the ECB will go to avoid a Eurozone breakup and to spur economic growth.  Nonetheless, European bank stocks have plunged -60% over the past year.

By contrast, in the United States, the Federal Reserve took a different tack by hiking rates in December and anticipating more hikes in 2016.  The intention was to put upward pressure on inflation and hence interest rates, but the opposite appears to have occurred.  Investors rushed into Treasuries where the yield on the 10-year has plunged from 2.29% at the time of the hike to 1.73%.  Steven Ricchiuto, chief economist at Mizuho Securities USA writes that, “The counterintuitive currency market behavior suggests markets are beginning to recognize that monetary policy can’t solve the deflation problem confronting the global economy.”

Finally, with oil selling at less than $30/barrel and the US’ major oil terminal at Cushing OK almost to full capacity, let’s revisit the “Peak Oil” scare of just a couple of decades ago.  Peak oil is an event based on geologist M. King Hubbert’s theory that there is a point in time when the maximum rate of extraction of petroleum is reached, and after that point the rate of petroleum extraction begins a terminal decline, ending in the destruction of our oil-based economy.  Indeed, petroleum production for the lower 48 states of the United States did reach a peak in early 1970 and then began a multi-decade decline.  However, the dramatic increases in production since 2010 have reversed the decline, and pushed total production back to within spitting distance of that 1970 peak.

Hydraulic fracturing, the ability of refiners to process oil shale and oil sands, and new advanced drilling techniques that are able to breathe new life into old oil fields have all served to dramatically increase North American oil production and have essentially reversed the phenomenon of “Peak oil”.

To remind us of the “Peak Oil” hysteria of the last several decades, here is a collage of magazine and book covers that now can be relegated to the Library of Bad Predictions:

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

The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market.  The average ranking of Defensive SHUT sectors rose to 8.5 from the prior week’s 9.5, while the average ranking of Offensive DIME sectors rose to 12.5 from the prior week’s 14.3.  The Defensive SHUT sectors continued to lead the Offensive DIME sectors.   Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

Summary:

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

FBAIS™ Fact Based Investment Allocation Strategies  for the week ending 2/5/2016

The very big picture:

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

Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best.   The CAPE is at 23.80, down from the prior week’s 24.56, after having earlier reached the level also reached at the pre-crash high in October, 2007.  Since 1881, the average annual returns for all ten year periods that began with a CAPE around this level have been just 3%/yr (see graph below).

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

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate.  The U.S. Bull-Bear Indicator (see graph below) turned negative on January 15th, and remains in Cyclical Bear territory at 41.15, down from the prior week’s 42.73.

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) turned positive on January 26th.  The indicator ended the week at 12, up from the prior week’s 6.  Separately, the quarter-by-quarter indicator – based on domestic and international stock trend status at the start of each quarter – gave a negative indication on the first day of January for the prospects for the first quarter of 2016.

Timeframe summary:

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

In the markets:

Stocks declined as investors reacted early in the week to further weakness in the energy complex and later in the week to a mixed job report and severe weakness in technology and biotech shares.  For the week, the Dow Jones Industrial Average declined -261 points to 16,204 (at -1.6%, this was the least-damaged index in the US).  The LargeCap S&P 500 declined -3.1%, the MidCap S&P 400 declined -2.9%, and the SmallCap Russell 2000 ended down over -4.8%.  The tech heavy NASDAQ, which was being propped up by a few highfliers, collapsed this week by -5.4% as the air came out of those highfliers in a big way.  See the “Finally” section for more.

In international markets, Canada’s TSX remained relatively flat, down -0.45% for the week, as natural resources – particularly precious metals – held up.  Markets were under pressure in Europe as Italy plunged -7.5%, Germany’s DAX declined -5.2%, and France’s CAC 40 gave up -4.9%.  The United Kingdom’s FTSE 100 ended down -3.8%.  In Asia, Japan’s Nikkei declined -3.9%, while Hong Kong’s Hang Seng lost -2%.  However, China’s Shanghai Stock Exchange, an exchange with little foreign involvement, ended the week up +0.95%.

In commodities, precious metals are beginning to shine as an ounce of silver rose +5.4% and Gold gained +$55.70 an ounce to $1174.10 an ounce.  Crude oil, though, continued its decline as a barrel of West Texas Intermediate dropped more than -$2 in the course of the week (after having been down more than -$4 in mid-week). 

In U.S. economic news, job growth slowed more than expected last month with the economy adding only 151,000 jobs, but the report came in strong in other ways that some analysts felt may give the Federal Reserve the evidence it needs to raise rates again.  The jobless rate fell to 4.9%, the lowest since February 2008, and the labor force participation index improved for a 3rd straight month to 62.7%.  Retail added 58,000 jobs last month; however some analysts question that number due to the announced layoffs of several major retailers which surged last month. Retailers announced 22,246 layoffs after the holiday season, up from just 6,700 a year ago.  Wal-Mart alone is cutting 10,000 jobs and closing 154 stores.  Macy’s is eliminating 4,500 positions and closing 40 stores.  Transportation and warehousing added 45,000 jobs, and according to the Labor Dept., even manufacturing added jobs – a surprising 29,000 —the best gain since early 2012.  A tighter labor market “should” lead to higher wage growth and “should” put upward pressure on inflation – but there’s no sign of either yet.

But the U.S. private-sector jobs picture as reported by payroll processing firm ADP from surveys of clients is not as positive in the manufacturing space as the government’s report.  According to ADP, instead of expanding as reported by the government, manufacturing jobs actually fell fractionally, down -0.1% versus a year earlier -matching the worst reading since September 2010. 

The Institute for Supply Management (ISM) report also showed manufacturing contracting, for the 4th straight month in January.  The index rose +0.2 point in January, but the slight improvement was from a downwardly revised 48 that matched the worst reading since June 2009 (sub-50 readings = contraction).  Export orders deteriorated while the jobs reading was the worst since May 2009.  Manufacturing has taken a hit as a strong dollar and weak global growth has weighed on manufacturing and the rest of the economy hasn’t taken up the slack.  On a positive note, the new orders and output sub-indexes rose back above 50 into expansion, and Markit’s U.S. manufacturing index climbed to 52.4 in January from December’s 3-year low of 51.2.

Growth in the service sector fell to a 2-year low as the Institute for Supply Management’s nonmanufacturing index declined 2.3 points in January to 53.5—the lowest since February 2014.  Of particular concern to economists is that this was the measure’s 3rd straight decline.  Export orders had their sharpest decline since March 2009.  Import orders were their weakest since summer of 2012.  The jobs index indicated slower hiring.  Markit’s services index, similar to ISM’s, also declined -1.1 points to 53.2, confirming ISM’s number and the weakest reading in over 2 years.

Personal income matched economists’ estimates rising 0.3% in December according to the Commerce Department.  Consumer spending was unchanged and spending on consumer durables declined.  The Commerce Department reported that consumer spending slowed to an annual growth rate of 2.2% in the 4th quarter.

Construction spending missed expectations of +0.6% growth, but remained ever so slightly positive in December up +0.1% to an annualized $1.12 trillion.  IHS Global Insight economist Patrick Newport stated that the construction sector “lost all momentum in the fourth quarter.”  Private residential spending gained 0.9%, bringing the annual gain to +8.1% – the weakest since May 2012.  Private nonresidential spending slipped -2.1%, while public construction spending rose +1.9%. 

In the Eurozone, the Purchasing Managers Index (PMI) fell -0.9 in January to 52.3.  The reading matches the flash reading and signals a slower rate of expansion – still positive, but not robustly so.  Output growth and orders weakened and the output prices gauge hit a 1-year low.  Overall, analysts believe the report won’t prevent the ECB from adopting an even more accommodative monetary easing policy, perhaps as early as March.  On a positive note, Eurozone unemployment decreased to a 4 year low in December, to 10.4%.  It’s the lowest overall unemployment rate since September 2011. 

In China, the government’s official manufacturing index remained in contraction for a 6th straight month, falling 0.3 point in January to 49.4 (sub-50 readings = contraction).  The China National Bureau of Statistics reported that the latest reading reflected weak export orders and efforts to curb overcapacity.  The services gauge declined to 53.5 from December’s 16-month high of 54.4.  Private-sector research firm Caixin reported that its manufacturing index came in at 48.4.  It was the 11th straight month of declining activity, per Caixin.  Caixin’s index focuses on small and midsize private firms, versus the government’s reading that focuses on larger state-owned enterprises.

Finally, this week’s overall market declines, bad as they were, masked a much worse development in the tech space.  While the overall NASDAQ dove -3.25% on Friday, tech names such as LinkedIn and Tableau Software each plunged by over -40% – in a single day.  Thirteen other U.S. software companies sank by at least -10%, and another 15 dropped over -5% on Friday.  Newly public companies such as New Relic, HubSpot, and Zendesk were all down over 20%.  Tableau’s comments were of particular concern to analysts because the company warned of “some softness in spending, especially in North America.”  Analyst Matthew Hedberg, of RBC Capital Markets, stated “This is the first time we have heard a high-quality enterprise software firm cite a slowdown in I.T. spending.” 

LinkedIn’s -43.6% plunge was the steepest drop in its 5 year history and wiped away almost $11 billion in market value and all gains since 2012 – in one day.  The business/social network forecast 2016 revenue growth of 20-22%, but expectations had been for 30% growth.  LinkedIn cited global weakness as one of its chief concerns.  The following graphic illustrates the recent plunges in many of high-tech’s previous highfliers.

:

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

The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market.  The average ranking of Defensive SHUT sectors fell to 9.5 from the prior week’s 6.3 (thanks to the carnage in the Biotech slice of Health Care), while the average ranking of Offensive DIME sectors rose to 14.3 from the prior week’s 16.3.  The Defensive SHUT sectors continued to lead the Offensive DIME sectors.   Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

Summary:

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

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

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

Sincerely,