Friday, August 7, 2015

Your Weekly Update --- AND --- You're nervous for the wrong reasons...

As I suggested in this morning's audio, the number of our clients
expressing concerns over the near-term state of the U.S. stock market
has been on the rise of late. Their worries are centered around a
general feeling that an economic collapse is close at hand --- spawned by
everything from China's struggling manufacturing sector, to the level
of U.S. (and other select nations') government debt (that's a
perennial [and legitimate] concern), to the size of the Fed's balance sheet, to the
signals sent by a massive commodity bear market, to the perceived lofty
level of the U.S. stock market. The now seven-day string of Dow
losses serves to bolster the doomsday argument.

While I can absolutely promise you that a bear market is indeed in our
future (can't, alas, tell you when), I can say with confidence that
the recent selloff has little, if anything, to do with the fears that
certain characters and media outlets are inspiring amongst some of our
clients. In fact, I'll argue that the market is struggling over what
has been relatively good economic news*---i.e., virtually nothing in
the data here at home supports the attention-hungry doomsayers'
prognostications, but it does support the notion that the Fed will
hike its benchmark interest rate come September.

*As you'll see if you read the economic highlights at the end, last week's economic
data releases were, on balance, quite strong, while the stock market sold off.

While I'm not all that bullish on the near-term prospects for the U.S.
stock market, again, I'm not at all worried over the present state of
the U.S. economy---nor is the Fed (other than its prospects for
heating up to a degree that might stoke above 2% inflation). And, therefore,
while anything can happen when we're talking the stock market (i.e., a
bear market---we must presume---can come growling at any  time), I'm
not losing sleep over the prospects for another 2008-style bear market
anytime soon---as such events are typically things of recessions. I do
fully expect, however, that we will experience the recently-elusive
10-20% correction a time or two or three before the economy and,
hence, the stock market is ready to purge the inevitable excesses
accumulated during the present bull market.

So when will I start worrying?

Well....      (click charts to enlarge)

When job growth turns negative:

Jobs Report

When weekly jobless claims are north of 300,000 on a trend basis:

Jobless Claims

When the ISM Service Sector Surveys are reading below 50:

ISM Services


When commodity prices are pushing extreme highs:

 CRB Index

When short-term interest rates exceed long-term interest rates (an
inverted yield curve):

Inverted Yield Curve

When market sentiment is at a bullish (optimistic) extreme:


When household formations decline on a trend basis:

Household Formations

When I have multiple parking options near my neighborhood mall
entrance on a Saturday afternoon:


When none of our clients are worried ("Bull markets die on euphoria"
J. Templeton):


The Stock Market:

Non-US developed markets—even after their recent pummeling—have outperformed the U.S. major averages (save for the NASDAQ Composite Index) year-to-date. Given many foreign markets’ cheaper valuations, early-stage recoveries and, yes, accommodative central banks, I remain constructive on non-U.S.. That said, there are a number of potential international hot buttons (as we’ve recently experienced) that could easily delay the narrowing of the gap between the valuations of U.S. and non-U.S. securities. That’s why we think long-term and stay diversified!

Here’s a look at the year-to-date price changes (according to CNBC) for the major U.S. indices—and for non-U.S. indices and U.S. sectors—using index ETFs as our non-U.S. and sector proxies:

Dow Jones Industrials:  -2.26%

S&P 500:  +1.20%

NASDAQ Comp:  +6.76%

EFA (Europe, Australia and Far East):  +6.39%

FEZ (Eurozone):  +6.00%

VWO (Emerging Markets):  -6.10%

Sector ETFs:

Here’s a look at the year-to-date results for a number of U.S. sector ETFs:

IYH (HEATHCARE):  +11.44%




XLK (TECH):  +1.79%



XLB (MATERIALS):  -5.60%

XLU (UTILITIES):  -7.14%

IYT (TRANSP):  -8.45%

XLE (ENERGY):  -13.78%

The Bond Market:

As I type, the yield on the 10-year treasury bond sits at 2.17%. Which is 2 basis points lower than where it was when I penned last week’s update.

TLT, an ETF that tracks an index of long-dated U.S. treasury bonds, saw its share price rise 1.48%  over the past 5 trading days (down 2.53% year-to-date). As I keep repeating, I see bonds in general sporting a risk/return trade-off that makes going out on the yield curve not worth the risk.

On Volatility and Timing:

Each week I share with you the very short-term (year-to-date) results for major indexes and sectors. I do this with a bit of hesitation, as I in no way want to give the impression that you, nor I for that matter, should base our long-term investment decisions on short-term movements in markets or their sectors. It can, however, serve as a reference point for how the markets are, or are not, responding to the data (which is why I, as a professional, track the short-term). While my beginning of the year optimism over non-US (developed markets that is) and the housing sector, and my pessimism over utilities, appears to be justified by recent results, I need to strongly (very strongly!) emphasize that I was not predicting what we’ve experienced thus far in 2015. Plus, while we maintained our healthcare exposure, I in no way expected the gains that sector has experienced this year. Same goes for energy, materials and emerging markets, only in the other direction.

My optimism or concern over a given sector or region is based on factors such as valuations, trends, supply and demand, monetary policy and cyclicality. My comfort in making allocation recommendations rests on the view that our clients are not short-minded investors (it can take awhile, if at all, for the market to reward what I believe to be good fundamental logic) who mistakenly believe that any human being possesses a capacity for market timing. Some people get lucky from time to time, but without exception, market timers are wrong far more often than they are right. The path to long-term investment success is fraught with bumps and potholes. The ones who successfully make the journey take it slow and never over-compensate when steering through and around the inevitable obstacles along  the way.

Here are last week’s U.S. economic highlights:

AUGUST 3, 2015

MOTOR VEHICLE SALES got July data off to a strong start. Exceeding the consensus estimate, coming in at a very strong 17.6 million. This speaks volumes about the health of the consumer...

PERSONAL INCOME AND OUTLAYS in June were uninspiring. Note, from Econoday's commentary below, the reference to weak June auto sales---per today's July auto sales report July bounced back very strong:

The consumer showed less life in June with inflation remaining very quiet. Consumer spending rose an as-expected 0.2 percent in June, down from a revised spike of 0.7 percent in May with the slowing tied in part to lower vehicle sales. Personal income, boosted by gains for rents and transfers that offset slight slowing in wages, rose slightly more than expected at 0.4 percent.

THE PCE PRICE INDEX came in very anemically, at 1.3% (core [ex-food and energy]) year-over-year. The Fed reportedly prefers this gauge over CPI...

THE ISM MANUFACTURING INDEX FOR JULY came in at 52.7. While the headline number was nothing to get excited about, there was some undlerying strength worth noting: The new orders component came in at 56.5 (best reading of the year), and production came in at a strong 56. A drop in inventories weighed on the number, but of course that's not all bad, in that it portends a potential pickup in production going forward. A legitimate negative is the decline of backlog orders to 42.5...

MARKIT'S MANUFACTURING PMI stayed steady and hit the estimate, at 53.8 for July. While the key points and summary from the release sound upbeat, the following commentary by Markit's Chief Economist dials it back a bit. The part about the benefit of low commodity prices speaks to what I've been preaching of late:
Key points: § Sharpest rise in production volumes for three months § Incoming new work increases at fastest pace since March § Job creation moderates across the manufacturing sector in July Markit U.S. Manufacturing PMI (seasonally adjusted) Source: Markit. Summary July’s survey data highlights that the U.S. manufacturing recovery stepped up a gear at the start of the third quarter, largely driven by the fastest rise in overall new business volumes since March. However, there were signs that manufacturers remained cautious regarding the business outlook, as purchasing activity expanded at the slowest pace for 18 months and job creation eased to a threemonth low in July. Meanwhile, input cost inflation remained subdued and factory gate charges increased only marginally during the latest survey period.

Commenting on the final PMI data, Chris Williamson, Chief Economist at Markit said: “The PMI picked up in July but the sector continues to endure one of the slowest growth phases seen over the past year and a half. Companies reported that the strong dollar once again hurt export competiveness, exacerbating already-weak demand in many countries, especially emerging markets and Asian economies. “However, the data suggest the manufacturing sector is struggling rather than collapsing against the various headwinds. Relief has also come in the form of lower commodity prices, and low oil prices in particular. “Low prices have helped to reduce manufacturers’ costs and protect margins, while households are also benefitting from low fuel bills in particular. The survey data showed manufacturing growth being led once again by producers of consumer goods in July. “Policymakers are unlikely to be dissuaded from raising interest rates on the back of the weak manufacturing performance, focusing instead on the steady improvement in the labour market and robust service sector growth which have been signalled at the start of third quarter. However, with other manufacturing PMI surveys showing emerging markets suffering their steepest downturn for two years, worries about the global economy may well deter the Fed from tightening policy this year.”

CONSTRUCTION SPENDING IN JUNE was subdued a bit by a surprise decline in single-family homes. Multi-family units---on the other hand---were up strong. Year-over-year saw single-gamily homes up a very strong 12.8% while multifamily homes were up a whopping 23.7%.

AUGUST 4, 2015

GALLOPS US ECONOMIC CONFIDENCE INDEX FOR JULY falls in line with other such surveys, coming in at -12, after Junes -8. Clearly, turmoil in Greece, uncertainty around China and market volatility here at home did a number on consumers' outlooks going forward. I look for sentiment to improve going forward. That said, a continued volatile equity market could subdue what might be an otherwise optimistic view of the US economy going forward.

THE JOHNSON REDBOOK RETAIL REPORT, improved last week, however, the year-over-year rate remains a weak 1.7%, up from the previous week's 1%.

THE ICSC RETAIL REPORT surprised me last week, as it came in at merely 1.5% year-over-year. Up until last week, this report has been coming in much hotter than Redbook's. Neither speaks particularly well of the fiscal health of the U.S. consumer...

FACTORY ORDERS FOR JUNE weren't bad at all. I particularly like the pickup in core capital goods orders and shipments. Here's Econoday:
Factory orders rose nearly as expected in June, up 1.8 percent for only the second gain in the last 11 months. The durable goods component, initially released last week, is unrevised at plus 3.4 percent in a gain distorted by aircraft orders but one that does reflect a pop higher for capital goods. The non-durables component, data released with today's report, rose 0.4 percent on order gains for oil and chemicals.

Orders for civilian aircraft jumped 65 percent in the month following, in routine up-and-down fashion for this component, a 32 percent downswing in May. Industries reporting respectable gains include 0.5 percent for furniture and 0.6 percent for motor vehicles as well as a 1.5 percent gain for machinery. Orders for energy equipment bounced back 5.5 percent after sinking 25 percent in May. Year-on-year, energy equipment is down 51 percent.

Looking at totals again, shipments rose a very solid 0.5 percent with shipments of core capital goods up 0.3 percent. The latter, which is a key reading that excludes aircraft, isn't spectacular but is still a solid gain for business investment. Unfilled orders, which have been in contraction most of the year, were unchanged in June. Inventories rose 0.6 percent in a build that falls in line with shipments, keeping the inventory-to-shipments ratio at a manageable 1.35.

Today's report offers rare good news for a factory sector that, due to weak exports and the collapse in oil & gas equipment, has been struggling to stay above water for the last year.

AUGUST 5, 2015

MORTGAGE PURCHASE APPS increased 3.0% last week while refis jumped 6.0%. Purchase apps are up a huge 23% year-over-year. Speaks loudly about my continued optimism over housing.

THE ADP EMPLOYMENT REPORT came in at 185k. A very okay number, but below the 210k consensus estimate.

THE MONTHLY TRADE BALANCE rose slightly above expectations as imports increased in June. Goods exports declined while services exports are very strong... we actually have a $19.7 billion trade surplus in services.

THE GALLUP U.S. JOB CREATION INDEX stayed at its record high 32 in July. That's the third month in a row.

MARKIT'S SERVICES SECTOR PMI INDEX came in at a solid 55.7 in July. New and backlog orders showed strength. Hiring was described as "robust" in the report. The 12-month outlook, however, was down for a second straight month.

THE ISM NON-MFG (SERVICES) INDEX came in way above expectations at 60.3. This is the highest reading in 10 years! Here's Econoday:
ISM's non-manufacturing sample reports a giant surge of strength, to 60.3 for the July index and the highest reading in 10 years. The result far surpasses expectations where the high-end Econoday forecast was 57.5.

New orders, at 63.8, and backlog orders, at 54.0, both show substantial acceleration from June as do new export orders. Strong orders are boosting employment which, echoing this morning's earlier release of the Services PMI report, is robust, at 59.6 for one of the strongest readings on the books.

Breadth is very strong with 15 of 18 industries reporting composite growth in the month including gains for retail trade, transportation & warehousing, and construction. Mining is one of two reporting contraction.

The rise in export orders underscores the strength of the nation's trade surplus in services which, despite strength in the dollar, is getting a boost from foreign demand for technical and management services. The service sector appears to be rolling along fine and will likely continue to offset weakness in manufacturing. And for Friday's jobs report outlook, the employment index in this report will help offset this morning's very weak ADP estimate.

CRUDE OIL INVENTORIES drew down by 4.4 million barrels last week. Refinery capacity ramped up to a nosebleed 96.1%. GASOLINE INVENTORIES rose 0.8 mbs and DISTILLATES increased 0.7 mbs.

AUGUST 6, 2015

THE CHALLENGER JOB CUT REPORT surged hihger in July to 105,696. However, a huge cutback by the Army (57k jobs cut over the next two years) was the primary culprit. 18,891 cuts in computer and electronics didn't help the number either.

WEEKLY JOBLESS CLAIMS continue to come in way below the important 300k mark---at 270k last week.

THE GALLUP U.S. PAYROLL TO POPULATION rate remained at 45.5 in July. This is the highest rate for any July since tracking began in 2010. Here's Econoday:
The U.S. Payroll to Population employment rate (P2P), as measured by Gallup, was 45.5 percent in July, unchanged from the previous month, and the highest rate Gallup has measured for any July since tracking began in 2010. The P2P measurements for the past two months tie for the second-highest recorded by Gallup after October 2012, when P2P hit 45.7 percent. This increase in P2P rates in the summer months is in line with an expected seasonal rise in full-time employment, though the baseline trend is higher in 2015 than it has been in the past two years.

The percentage of U.S. adults participating in the workforce in July was 66.9 percent. While this is 0.3 percentage points higher than July of last year and at least 0.6 points lower than the rate measured in any other July since Gallup began tracking it in January 2010. Since that time, the workforce participation rate has remained in a narrow range, from a low of 65.8 percent to a high of 68.5 percent.

Gallup's unadjusted U.S. unemployment rate was 6.1 percent in July, up nominally from June's 6.0 percent, but still near the 5.8 percent low point from December 2014 in Gallup's five-year trend. However, after years of gradual decline, Gallup's unemployment measurement has not substantially changed from the 6.3 percent measured in July 2014. Gallup's U.S. unemployment rate represents the percentage of adults in the workforce who did not have any paid work in the past seven days, for an employer or themselves, and who were actively looking for and available to work.

Gallup's measure of underemployment in July is 14.2 percent, the lowest level recorded since Gallup began tracking it daily in 2010. Gallup's U.S. underemployment rate combines the percentage of adults in the workforce who are unemployed (6.1 percent) and those who are working part time but desire full-time work (8.1 percent).

THE BLOOMBERG CONSUMER COMFORT INDEX declined slightly last week to 40.3. The trend in this indicator has been decidedly lower of late. I suspect recent global concerns have contributed measureably to the weaker sentiment.

NATURAL GAS INVENTORIES rose again last week by 32 billion cubic feet.

THE FED BALANCE SHEET increased by $0.9 billion last week, after dropping $15 billion the week prior. RESERVE BANK CREDIT decreased by $9 billion.

M2 MONEY SUPPLY rose yet again last week by $12.1 billion.

AUGUST 7, 2015

THE BLS JOBS REPORT FOR JULY came in right at expecations, 215k. The job market is strong, there's no question. Here's the breakdown:
Other details look surprisingly solid with payrolls rising 60,000 in trade & transportation, for a third straight strong gain, and professional & business services rising 40,000 to extend their long healthy run. Retailers continue to add jobs, up 36,000 for their third straight strong gain with the motor vehicle subset up 13,000 and reflecting the strength of car sales. Manufacturing, which is usually weak, rose a notable 15,000 in the month with construction, where lack of skilled labor is being reported, showing a modest gain of 6,000.

THE HEADLINE UNEMPLOYMENT RATE held at 5.3% while the U6 (includes part-timers who'd prefer full-time, discouraged and marginally attached workers) dropped a tenth to 10.4%.


CONSUMER CREDIT rose in June by $20.7 billion. The breakdown helps set an optimistic stage for both retail and auto going forward.

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