For a PDF version (better formatting) of the below commentary please click here Weekly Letter 12-8-2014
Commentary at a glance:
-US markets almost made it seven weeks in a row of gains.
-Retail season started off slow.
-ECB meeting held some gloomy forecasts and no new bond buying.
-Saudi Arabia and OPEC continue to wage an oil war with other producers.
-Economic news releases came in above market expectations, thanks to solid payroll figures.
Market Wrap-Up: For the first trading week of December, the markets picked right back up where they left off going into the Thanksgiving Holiday. The charts below are of the three major US indexes in green with their respective trading channels represented by the red lines, as well as the VIX with the average level of the VIX over the past one year drawn as a red line in the lower right chart:
As you can see in the above charts, all three of the major US indexes can be clearly drawn into trading channels at this point, given the steady rally of the past few weeks. A trading channel emerges when an investment or index is stuck within a well defined range (red lines on the index charts above). In this case, the ranges are all upward sloping and very narrow. When an investment is in a trading range there is said to be an upper level of resistance and a lower level of support and it is not uncommon to see the price of an investment or index bounce around between the two levels. Drawing the channels in hindsight makes it easy to cherry pick a good time period to draw, but any time a trading channel is tested both on the upside and downside a few times it becomes pretty well followed by computerized traders. As time goes on, whatever is being tracked has to continue to rise at a nearly constant rate to stay within the range. If the investment breaks up through the resistance line (upper red line) it is said to be a bullish breakout and technical investors expect the investment to move higher. If, however, the investment breaks down through the support level (lower red line) the investment is anticipated to move much lower by technical investors. While trading on the channels can be very difficult, it is nice to keep it in mind as there are a lot of traders who do follow such things and they can push the markets one way or the other, especially in the trading environment we currently find ourselves investing in.
From a technical standpoint, the Dow (upper right pane above) overtook the NASDAQ (lower left pane above) to technically become the strongest index last week. The S&P 500 (upper left pane above) stayed in the middle of the pack as the others flip-flopped. At this point the indexes look like they want to continue to bleed higher, meaning they will likely continue to move higher at a slow pace unless there is some major reason not to. Oil declining does not seem to be much of a worry for the markets, but it has been a killer is various aspects of the markets, such as the oil and gas exploration sector. The VIX (lower right pane above), meanwhile, seems perfectly content moving continually lower as it has now traded down to about the lowest level we have seen in 2014 and looks to finish out the year at one of the lowest levels in the past 5 years.
National News: National news last week held little of interest as the major media outlets tried to come up with stories that caught people’s attention in the absence of anything really meaningful. The 2014 holiday shopping season, while not a bust in total, has dug itself a pretty deep hole with the lack luster sales being reported from Black Friday and the first full week of the holiday shopping season. It seems shoppers are much smarter this year, comparing prices everywhere with their phones and getting the best deals. This is great for big retailers such as Amazon, which can update prices very quickly to adjust to a changing environment, but much more difficult for the big box retailers who have a hard time with change. The volume of goods sold during this time of year may very well be higher than they were last year or the year before, but it seems the discount prices being demanded by the savvy consumers will eat into the already slim margin retailers fight over. One aspect of the holiday season that is actually helping sales is the declining price of oil and the affect we have been seeing at the pump.
According to AAA’s fuel gauge report, the prices paid right now are the lowest we have seen since 2011. The chart to the right is from the AAA fuel gauge report website and shows the average price paid over the past four years. As you can see, this is the first time we have been below $3 as a nationwide average in a very long time. What does it mean for holiday sales? It means the average US consumer has more money in their pocket right now to spend than they would have had if they were still filling up their cars with gas prices above $3.25, as they were this time last year. To a family that is living paycheck to paycheck, this drop in fuel could amount to as much as $100 or more in a month, money that will likely be spent over the holidays. Also, it does not look like prices at the pump will be increasing any time soon as oil continues to decline as a small fuel war seems to be brewing between the Middle East and other major oil producers around the world.
Last week wrapped up the majority of the well known companies that released their third quarter earnings figures, leaving us about a month away from the official start to the fourth quarter 2014 earnings season. Below is the final table of the better known companies for third quarter 2014 that released earnings last week and the amount by which they either exceeded or fell short of expectations. Negative earnings surprises are highlighted in red while positive surprises in excess of 10 percent are highlighted in green:
| Abercrombie & Fitch |
2% |
Express |
6% |
| Aeropostale |
0% |
GUESS? |
33% |
| American Eagle Outfitters |
0% |
Kroger |
13% |
| Barnes & Noble |
-29% |
Sears |
18% |
| Big Lots |
-20% |
Smith & Wesson |
29% |
| Bob Evans Farms |
6% |
Sportsman’s Warehouse |
11% |
| Dollar General |
-1% |
Zumiez |
8% |
The interesting aspect to the companies that released earnings last week was the wide deviation in the performance of the retailers. Some easily beat expectations, such as Guess, Kroger, Sears and Smith and Wesson; while other such as Barnes & Noble and Big Lots seemed to fall flat on their collective faces. Barnes and Noble has been in trouble for a long time as book stores have largely become a thing of the past, but it was still surprising to see them miss such low expectations. As for comments about the holiday season from the above retailers, it seems most echoed the slightly softer sales than expected during the first weekend of the holiday shopping season. While Smith and Wesson beat current expectations, their outlook was not very strong as they have seen a continued decline in the number of fire arms purchased. This stock trades wildly when there is some kind of large scale gun violence, due to fears that the government may step in and limit the number and type of firearms that people are allowed to own. With Republicans back in control of both houses in Congress, it seems highly unlikely that any major adjustment to the current gun control laws will be passed over the course of the next two years.
This week there are only three companies announcing earnings that anyone would know about: AutoZone, Costco and Vail Resorts. Costco will be the one investors may watch even though holiday shopping is not a staple of their business.
International News: International news last week had two main focal points: one being the European Central Bank meeting held on Wednesday and Thursday and the ongoing struggle between Middle Eastern oil producers and the rest of the world’s oil producing nations. At the conclusion of the ECB meeting, the statement made held very little pertaining to concrete actions the ECB is planning on taking early next year to help stem the slide in the European economy, a slide that seems to be gaining speed. There was, however, another great one-liner from President Draghi when he said very enthusiastically that the ECB “Won’t tolerate!” low inflation or even deflation creeping into Europe. The sad part is that he may already be too late for several regions as price deflation seems to already be taking hold in several key economies. When asked about what the officials at the meeting discussed purchasing, President Draghi said they had discussed the potential for purchasing all assets classes, with the exception of gold. The current thinking is that the ECB will embark on a full scale quantitative easing program at the January 22nd meeting and that the program will include the purchases of a wide variety of financial instruments, such as asset backed bonds, as well as sovereign and potentially even corporate bonds. All of these actions will be undertaken in an attempt to stop deflation and to try to get the European economy growing, something that is becoming harder and harder to do given the latest projections from the ECB. The chart to the right was created with data from the ECB’s webpage under the meeting minutes and shows the downward revision the ECB made to the future growth of the region over the remainder of 2014, 2015 and 2016. The startling aspect of the chart is that the revisions are made to recent forecasts set at the end of the September meeting and the ECB has reduced GDP growth expectations for the full 2015 year by 0.6 percent. This also comes at a time when the costs of fuel and energy have been falling due to the massive decline in the price of oil. Europe really looks to be headed for some trouble and it appears President Draghi knows it, but why is the ECB taking so long to act? It seems President Draghi is waiting until after the holidays to embark on his quantitative easing, which means he is hoping by some miracle that Europe starts to right the ship on its own with the governments adjusting spending and businesses becoming more competitive on the international stage, but this seems to be a waste of time. He has now been talking about taking action for the better part of two years and the time is either now or drawing very near for him to make good on his pledge to do something about the faltering economic health of Europe. At least it looks like Germany will not try to hold up the asset purchases in court nor will any of the other countries that have threatened to do so in the past. While the ECB was discussing how to save their economy, in another part of the world OPEC was trying to figure out how to keep the group on the same page, as Saudi Arabia seems to be willing to do things other OPEC members cannot afford to do.
With OPEC’s decision two weeks ago on Thanksgiving to not lower output, the fallout from OPEC’s meeting in Vienna is continuing as prices now look ready to decline even further. The cover of The Economist last week has a great cartoon accompanying a very interesting article about the oil dispute. The full article can be found here http://tinyurl.com/klhxbej. Last week Saudi Arabia announced that it expects to see oil stabilize around $60 per barrel, a decline of nearly 50 percent from the peak seen back in June. At the price of $60 per barrel the majority, if not all, of the OPEC countries are going to have a hard time funding their government spending with oil money. This decline will also likely lead to a shake out of weak companies in the oil industry around the world. There will likely be large scale protests in countries such as Iran and Venezuela, which were both already experiencing trouble prior to the decline in oil, which is the lifeblood of the countries. Russia will also likely suffer as the latest figures show that the country has already burned through more than $400 billion of its $1 trillion reserve account kept for rainy days when the price of oil is too far below what it costs them to get it out of the ground. Unrest is likely if the prices keep falling and remain low for an extended period of time, the key being an “extended period” of time. Short-term, most companies and countries can afford to keep everything going at these prices, but if we get a few months or quarters around $60 per barrel, it seems many smaller, more risky countries and companies will be at risk of power changes and or going out of business. In the end, Saudi Arabia wants to once against assert itself as relevant in the world’s oil markets and prove all of the excitement over the US energy independence to be short lived. It has now become a waiting game to see who blinks first.
Market Statistics: Seven weeks in a row of gains on all three of the major US indexes was not to be as the NASDAQ failed to move higher last week. Both the Dow and the S&P 500, however, did make it seven weeks in a row and booked new all time highs along the way last week. Volume was about average when looking across all three of the major indexes:
| Index |
Change |
Volume |
| Dow |
0.73% |
Average |
| S&P 500 |
0.38% |
Above Average |
| NASDAQ |
-0.23% |
Average |
With the breakdown of the NASDAQ some traders are concerned that we could be moving into a little bit of a correction, but it is far too early for this call to be made at this point. While we have been in an upward moving market for the past few months there is no more reason to think this is the start of a correction than any of the other less-than-one-percent declines we have seen in the NASDAQ, of which there have recently been many.
When looking at sectors, the following were the top 5 and bottom 5 performers over the course of the previous week:
| Top 5 Sectors |
Change |
|
Bottom 5 Sectors |
Change |
| Semiconductors |
3.66% |
|
Telecommunications |
-3.25% |
| Broker Dealers |
3.56% |
|
Home Construction |
-1.39% |
| Regional Banks |
2.43% |
|
Consumer Staples |
-1.22% |
| Financial Services |
2.35% |
|
Consumer Goods |
-0.79% |
| Healthcare Providers |
2.09% |
|
Oil & Gas Exploration |
-0.77% |
Semiconductors made it two weeks in a row of being the best performing sector of the markets last week. Financials were the other standout group last week, taking over three of the top five sectors of the markets as banking conditions in the US and abroad continue to improve. With oil falling as it has been the last few months it was not very surprising to see oil and gas exploration on the top 5 decliners list. This sector of the markets has been beat up extensively over the past few months and there will likely be a great buying opportunity in the future, but for now it is best to let the various countries fight over the price of oil without being involved in it from an investment standpoint.
The broad US fixed income market moved lower last week, not so much on any news out about the US, but on the continued speculation about what the ECB will undertake in Europe:
| Fixed Income |
Change |
| Long (20+ years) |
-1.14% |
| Middle (7-10 years) |
-1.03% |
| Short (less than 1 year) |
0.00% |
| TIPS |
-1.11% |
Last week the US dollar increased in value by 1.02 percent against a basket of international currencies, thanks to a sharp move upward on Friday after an otherwise pretty boring week. The strongest of the currencies last week was the Canadian dollar as it gave up only 0.18 percent against the US dollar. Japan once again saw the weakest currency globally last week with the Yen giving up 2.4 percent against the value of the US dollar. The chart to the right from Bloomberg shows just how fast the Japanese Yen is falling versus the US dollar; you can see the Yen was trading around 101 from June until mid-August, last week crossing over the 120 to one level, a decline of more than 20 percent in the value of the Yen. While this is great for companies that export goods from Japan it is very hard on the local economy as everything that is imported (many items in Japan) is seeing cost increases well beyond what everyday people can afford. 
Commodities were mixed last week as oil continued to slide, while the metals jumped higher:
| Metals |
Change |
|
Commodities |
Change |
| Gold |
2.07% |
|
Oil |
-0.47% |
| Silver |
5.26% |
|
Livestock |
-2.92% |
| Copper |
2.30% |
|
Grains |
1.83% |
|
|
|
Agriculture |
-0.67% |
The overall Goldman Sachs Commodity Index turned in a loss of 2.76 percent last week, while the Dow Jones UBS Commodity Index declined by -0.12 percent. Oil had a pretty tame week considering the news out of Saudi Arabia that the country would not mind seeing oil at $60 per barrel. In total, oil only declined by 0.47 percent during the week. Livestock had a difficult week last week, falling for the third week in a row, this time by nearly three percent. Gold, Silver and Copper all moved higher last week as the appetite for metals seemed to return to the markets. Silver turned in the best performance, gaining more than five percent, while Copper gained 2.3 percent and Gold gained 2.07 percent.
China saw its financial markets jump higher last week for the second week in a row with the Shanghai based SE Composite Index gaining 9.50 percent in one of the largest weekly gains we have seen in the past two years. We have now seen the index increase by more than 18 percent in just the last 2 weeks. The worst performance of the week last week was found in Brazil with the Sao Paulo based Se BOVESPA Index declining by 4.89 percent as the political uncertainty moving into the new term for Dilma Rousseff remains very elevated.
The VIX started out last week moving higher, easily jumping over the average level we have seen over the past year on Monday, only to follow up the move by declining the next four days in a row. The VIX ended the week at the lowest level we have seen in the middle of August, prior to the spike up over 25 during October. In total last week the VIX declined by 11.33 percent. At the current level of 11.82 the VIX is implying a move of about 3.41 percent over the course of the next 30 days. As always, the direction of the move is unknown. Going into the New Year the VIX looks set to be at the lowest level to start a new year since 2007, in a sign that the slow upward move in the US economy may be able to continue well into 2015.
For the trading week ending on 12/5/2014, returns in FSI’s hypothetical models* (net of a 1% annual management fee) were as follows:
|
Last Week |
Year to Date |
| Aggressive Model |
0.29 % |
7.79 % |
| Aggressive Benchmark |
-0.22 % |
3.62 % |
| Growth Model |
0.22 % |
8.23 % |
| Growth Benchmark |
-0.18 % |
2.91 % |
| Moderate Model |
0.12 % |
8.02 % |
| Moderate Benchmark |
-0.12 % |
2.18 % |
| Income Model |
0.06 % |
7.45 % |
| Income Benchmark |
-0.07 % |
1.22 % |
*Model performance does not represent any specific account performance but rather a model of holdings based on risk levels that are like our actual holdings, the hypothetical models are rebalanced daily to model targets.
We made no changes to our models over the course of the previous week as the week was sort of a trendless week for many of our holdings. Oil continues to look like a good spot for future investments, but currently it would be like trying to catch a falling knife. It is typically much better to let the knife hit the floor and then pick it up. Our holding in the rising US dollar continues to perform well as do the majority of our other positions. We are still positioned for a market that is far more choppy than it has been recently so we should be well positioned if the market decides to move up or down between now and the end of the year.
Economic News: Last week was all about employment and the slow but steady recovery we have been seeing in the US for the past few years. In total there were two releases that beat expectations, (highlighted in green) and one that significantly missed expectations (highlighted in red below):
| Economic Impact |
Date |
Economic News Release |
Date Range |
Actual |
Expectation |
| Slightly Positive |
12/1/2014 |
ISM Index |
November 2014 |
58.7 |
58.0 |
| Neutral |
12/3/2014 |
ADP Employment Change |
November 2014 |
208K |
225K |
| Slightly Positive |
12/3/2014 |
ISM Services |
November 2014 |
59.3 |
57.5 |
| Neutral |
12/4/2014 |
Initial Claims |
Previous Week |
297K |
295K |
| Neutral |
12/4/2014 |
Continuing Claims |
Previous Week |
2362K |
2350K |
| Positive |
12/5/2014 |
Nonfarm Payrolls |
November 2014 |
321K |
230K |
| Positive |
12/5/2014 |
Nonfarm Private Payrolls |
November 2014 |
314K |
235K |
| Neutral |
12/5/2014 |
Unemployment Rate |
November 2014 |
5.80% |
5.80% |
| Negative |
12/5/2014 |
Factory Orders |
October 2014 |
-0.70% |
0.20% |
| Neutral |
12/5/2014 |
Consumer Credit |
October 2014 |
$13.2B |
$16.5B |
Data for table from Econoday.com, Bloomberg and Yahoo Finance
The week started off on Monday with the release of the ISM Index for the month of November, which came in just slightly above market expectations, but it was not enough for the markets to get excited about. On Wednesday the ADP employment change figure gave a misleading number, indicating that fewer jobs than expected had been reported during November. This negative jobs number, however, did not hold through the end of the week. Also during the day on Wednesday the services side of the ISM was released and came in slightly better than anticipated, much like the overall ISM released on Monday. On Thursday the standard weekly unemployment releases held nothing new as both came in very close to market expectations. On Friday the nonfarm payroll numbers, both public and private, beat market expectations and did so by a wide margin. Both figures came in well above 300,000; this was the first reading over 300,000 since June of 2010 on both the public and private payroll figures. When the payroll figures came out there was a collective “wow” on Wall Street as both figures beat expectations by such a wide margin that everyone was caught by surprise. Despite the strong showing on the payroll figures, however, the overall unemployment rate failed to move, staying at 5.8 percent for the month of November, just like it was during October. The labor force participation rate failed to move much, staying at a very low level (62.8 percent), a sign that despite the overall unemployment rate being under six percent the US still has a long way to go to get back to the employment level seen prior to the decline in 2008. Factory orders for the month of October were the sole downer on Friday, coming in well below expectations, with the number actually being a negative 0.7 percent, while expectations had been for a slight increase of 0.2 percent. Factory orders turning negative so close to the holiday shopping season is concerning given that the holiday sales season did not start as strong as many would have liked. Last week wrapped up on Friday with the release of the Consumer Credit report for the month of October, which showed that credit expanded by slightly less than anticipated, but did not slow enough to cause alarm.
This week is a very slow week for economic news releases; the releases highlighted below have the potential to move the overall markets:
| Date |
Release |
Release Range |
Market Expectation |
| 12/11/2014 |
Initial Claims |
Previous Week |
295K |
| 12/11/2014 |
Continuing Claims |
Previous Week |
2350K |
| 12/11/2014 |
Retail Sales |
November 2014 |
0.40% |
| 12/11/2014 |
Retail Sales ex-auto |
November 2014 |
0.20% |
| 12/12/2014 |
PPI |
November 2014 |
-0.10% |
| 12/12/2014 |
Core PPI |
November 2014 |
0.10% |
| 12/12/2014 |
University of Michigan Consumer Sentiment Index |
December 2014 |
89.5 |
Data for table from Econoday.com, Bloomberg and Yahoo Finance
This week starts on Thursday with the release of the standard weekly unemployment related figures, with initial jobless claims expected to have declined a little while continuing jobless claims are expected to have declined by 12,000. The bigger release of the day on Thursday will be the retail sales figure for the month of November, as this release includes Black Friday as well as the first full weekend of the holiday shopping season. Expectations are for a 0.4 percent increase, but with the figures we saw about Black Friday it would not be surprising to see this release significantly miss market expectations. If we get a negative reading on either the overall retail sales or retail sales excluding auto sales figures the market will likely react poorly; at least that is what most people would think it would do. But with the Fed starting to raise interest rates on the horizon, it is anyone’s guess what would happen to a negative print on retail sales. The market might jump higher in anticipation of the poor sales leading the Fed to hold off increasing interest rates a little longer. On Friday the Producer Price Index (PPI) for the month of November is set to be released with expectations of a small decline of one tenth of a percent, due in large part to the continued decline in the price of energy and oil specifically. When energy, food and fuel as well as a few other items are removed from the calculation you arrive at the Core PPI number, a number that is historically much more stable and, this time, is expected to increase by one tenth of a percent. Wrapping up the week on Friday this week is the release of the University of Michigan’s Consumer Sentiment Index, which is expected to increase slightly from 88.8 up to 89.5. If we see a reading of 89.5 it would be the highest reading on the index that we have seen over the past 6 years. With no members of the US Federal reserve expected to make any statements this week, Fed watchers will be watching Europe closely for any type of statements or speeches out of the ECB about what it plans on doing going forward with its bond buying program.
Fun fact of the week: A picture (and accompanying table) can be worth a thousand words!
Source:US Energy Information Administration
While the US is touting energy independence, remember we are far smaller in term of proven oil reserves than many of the oil powerhouses around the world.
Peter's Stock Market Blog
Peter’s Financial Market Commentary December 8th 2014
December 8, 2014
For a PDF version (better formatting) of the below commentary please click here Weekly Letter 12-8-2014
Commentary at a glance:
-US markets almost made it seven weeks in a row of gains.
-Retail season started off slow.
-ECB meeting held some gloomy forecasts and no new bond buying.
-Saudi Arabia and OPEC continue to wage an oil war with other producers.
-Economic news releases came in above market expectations, thanks to solid payroll figures.
Market Wrap-Up: For the first trading week of December, the markets picked right back up where they left off going into the Thanksgiving Holiday. The charts below are of the three major US indexes in green with their respective trading channels represented by the red lines, as well as the VIX with the average level of the VIX over the past one year drawn as a red line in the lower right chart:
As you can see in the above charts, all three of the major US indexes can be clearly drawn into trading channels at this point, given the steady rally of the past few weeks. A trading channel emerges when an investment or index is stuck within a well defined range (red lines on the index charts above). In this case, the ranges are all upward sloping and very narrow. When an investment is in a trading range there is said to be an upper level of resistance and a lower level of support and it is not uncommon to see the price of an investment or index bounce around between the two levels. Drawing the channels in hindsight makes it easy to cherry pick a good time period to draw, but any time a trading channel is tested both on the upside and downside a few times it becomes pretty well followed by computerized traders. As time goes on, whatever is being tracked has to continue to rise at a nearly constant rate to stay within the range. If the investment breaks up through the resistance line (upper red line) it is said to be a bullish breakout and technical investors expect the investment to move higher. If, however, the investment breaks down through the support level (lower red line) the investment is anticipated to move much lower by technical investors. While trading on the channels can be very difficult, it is nice to keep it in mind as there are a lot of traders who do follow such things and they can push the markets one way or the other, especially in the trading environment we currently find ourselves investing in.
From a technical standpoint, the Dow (upper right pane above) overtook the NASDAQ (lower left pane above) to technically become the strongest index last week. The S&P 500 (upper left pane above) stayed in the middle of the pack as the others flip-flopped. At this point the indexes look like they want to continue to bleed higher, meaning they will likely continue to move higher at a slow pace unless there is some major reason not to. Oil declining does not seem to be much of a worry for the markets, but it has been a killer is various aspects of the markets, such as the oil and gas exploration sector. The VIX (lower right pane above), meanwhile, seems perfectly content moving continually lower as it has now traded down to about the lowest level we have seen in 2014 and looks to finish out the year at one of the lowest levels in the past 5 years.
National News: National news last week held little of interest as the major media outlets tried to come up with stories that caught people’s attention in the absence of anything really meaningful. The 2014 holiday shopping season, while not a bust in total, has dug itself a pretty deep hole with the lack luster sales being reported from Black Friday and the first full week of the holiday shopping season. It seems shoppers are much smarter this year, comparing prices everywhere with their phones and getting the best deals. This is great for big retailers such as Amazon, which can update prices very quickly to adjust to a changing environment, but much more difficult for the big box retailers who have a hard time with change. The volume of goods sold during this time of year may very well be higher than they were last year or the year before, but it seems the discount prices being demanded by the savvy consumers will eat into the already slim margin retailers fight over. One aspect of the holiday season that is actually helping sales is the declining price of oil and the affect we have been seeing at the pump.
According to AAA’s fuel gauge report, the prices paid right now are the lowest we have seen since 2011. The chart to the right is from the AAA fuel gauge report website and shows the average price paid over the past four years. As you can see, this is the first time we have been below $3 as a nationwide average in a very long time. What does it mean for holiday sales? It means the average US consumer has more money in their pocket right now to spend than they would have had if they were still filling up their cars with gas prices above $3.25, as they were this time last year. To a family that is living paycheck to paycheck, this drop in fuel could amount to as much as $100 or more in a month, money that will likely be spent over the holidays. Also, it does not look like prices at the pump will be increasing any time soon as oil continues to decline as a small fuel war seems to be brewing between the Middle East and other major oil producers around the world.
Last week wrapped up the majority of the well known companies that released their third quarter earnings figures, leaving us about a month away from the official start to the fourth quarter 2014 earnings season. Below is the final table of the better known companies for third quarter 2014 that released earnings last week and the amount by which they either exceeded or fell short of expectations. Negative earnings surprises are highlighted in red while positive surprises in excess of 10 percent are highlighted in green:
The interesting aspect to the companies that released earnings last week was the wide deviation in the performance of the retailers. Some easily beat expectations, such as Guess, Kroger, Sears and Smith and Wesson; while other such as Barnes & Noble and Big Lots seemed to fall flat on their collective faces. Barnes and Noble has been in trouble for a long time as book stores have largely become a thing of the past, but it was still surprising to see them miss such low expectations. As for comments about the holiday season from the above retailers, it seems most echoed the slightly softer sales than expected during the first weekend of the holiday shopping season. While Smith and Wesson beat current expectations, their outlook was not very strong as they have seen a continued decline in the number of fire arms purchased. This stock trades wildly when there is some kind of large scale gun violence, due to fears that the government may step in and limit the number and type of firearms that people are allowed to own. With Republicans back in control of both houses in Congress, it seems highly unlikely that any major adjustment to the current gun control laws will be passed over the course of the next two years.
This week there are only three companies announcing earnings that anyone would know about: AutoZone, Costco and Vail Resorts. Costco will be the one investors may watch even though holiday shopping is not a staple of their business.
International News: International news last week had two main focal points: one being the European Central Bank meeting held on Wednesday and Thursday and the ongoing struggle between Middle Eastern oil producers and the rest of the world’s oil producing nations. At the conclusion of the ECB meeting, the statement made held very little pertaining to concrete actions the ECB is planning on taking early next year to help stem the slide in the European economy, a slide that seems to be gaining speed. There was, however, another great one-liner from President Draghi when he said very enthusiastically that the ECB “Won’t tolerate!” low inflation or even deflation creeping into Europe. The sad part is that he may already be too late for several regions as price deflation seems to already be taking hold in several key economies. When asked about what the officials at the meeting discussed purchasing, President Draghi said they had discussed the potential for purchasing all assets classes, with the exception of gold. The current thinking is that the ECB will embark on a full scale quantitative easing program at the January 22nd meeting and that the program will include the purchases of a wide variety of financial instruments, such as asset backed bonds, as well as sovereign and potentially even corporate bonds. All of these actions will be undertaken in an attempt to stop deflation and to try to get the European economy growing, something that is becoming harder and harder to do given the latest projections from the ECB. The chart to the right was created with data from the ECB’s webpage under the meeting minutes and shows the downward revision the ECB made to the future growth of the region over the remainder of 2014, 2015 and 2016. The startling aspect of the chart is that the revisions are made to recent forecasts set at the end of the September meeting and the ECB has reduced GDP growth expectations for the full 2015 year by 0.6 percent. This also comes at a time when the costs of fuel and energy have been falling due to the massive decline in the price of oil. Europe really looks to be headed for some trouble and it appears President Draghi knows it, but why is the ECB taking so long to act? It seems President Draghi is waiting until after the holidays to embark on his quantitative easing, which means he is hoping by some miracle that Europe starts to right the ship on its own with the governments adjusting spending and businesses becoming more competitive on the international stage, but this seems to be a waste of time. He has now been talking about taking action for the better part of two years and the time is either now or drawing very near for him to make good on his pledge to do something about the faltering economic health of Europe. At least it looks like Germany will not try to hold up the asset purchases in court nor will any of the other countries that have threatened to do so in the past. While the ECB was discussing how to save their economy, in another part of the world OPEC was trying to figure out how to keep the group on the same page, as Saudi Arabia seems to be willing to do things other OPEC members cannot afford to do.
With OPEC’s decision two weeks ago on Thanksgiving to not lower output, the fallout from OPEC’s meeting in Vienna is continuing as prices now look ready to decline even further. The cover of The Economist last week has a great cartoon accompanying a very interesting article about the oil dispute. The full article can be found here http://tinyurl.com/klhxbej. Last week Saudi Arabia announced that it expects to see oil stabilize around $60 per barrel, a decline of nearly 50 percent from the peak seen back in June. At the price of $60 per barrel the majority, if not all, of the OPEC countries are going to have a hard time funding their government spending with oil money. This decline will also likely lead to a shake out of weak companies in the oil industry around the world. There will likely be large scale protests in countries such as Iran and Venezuela, which were both already experiencing trouble prior to the decline in oil, which is the lifeblood of the countries. Russia will also likely suffer as the latest figures show that the country has already burned through more than $400 billion of its $1 trillion reserve account kept for rainy days when the price of oil is too far below what it costs them to get it out of the ground. Unrest is likely if the prices keep falling and remain low for an extended period of time, the key being an “extended period” of time. Short-term, most companies and countries can afford to keep everything going at these prices, but if we get a few months or quarters around $60 per barrel, it seems many smaller, more risky countries and companies will be at risk of power changes and or going out of business. In the end, Saudi Arabia wants to once against assert itself as relevant in the world’s oil markets and prove all of the excitement over the US energy independence to be short lived. It has now become a waiting game to see who blinks first.
Market Statistics: Seven weeks in a row of gains on all three of the major US indexes was not to be as the NASDAQ failed to move higher last week. Both the Dow and the S&P 500, however, did make it seven weeks in a row and booked new all time highs along the way last week. Volume was about average when looking across all three of the major indexes:
With the breakdown of the NASDAQ some traders are concerned that we could be moving into a little bit of a correction, but it is far too early for this call to be made at this point. While we have been in an upward moving market for the past few months there is no more reason to think this is the start of a correction than any of the other less-than-one-percent declines we have seen in the NASDAQ, of which there have recently been many.
When looking at sectors, the following were the top 5 and bottom 5 performers over the course of the previous week:
Semiconductors made it two weeks in a row of being the best performing sector of the markets last week. Financials were the other standout group last week, taking over three of the top five sectors of the markets as banking conditions in the US and abroad continue to improve. With oil falling as it has been the last few months it was not very surprising to see oil and gas exploration on the top 5 decliners list. This sector of the markets has been beat up extensively over the past few months and there will likely be a great buying opportunity in the future, but for now it is best to let the various countries fight over the price of oil without being involved in it from an investment standpoint.
The broad US fixed income market moved lower last week, not so much on any news out about the US, but on the continued speculation about what the ECB will undertake in Europe:
Last week the US dollar increased in value by 1.02 percent against a basket of international currencies, thanks to a sharp move upward on Friday after an otherwise pretty boring week. The strongest of the currencies last week was the Canadian dollar as it gave up only 0.18 percent against the US dollar. Japan once again saw the weakest currency globally last week with the Yen giving up 2.4 percent against the value of the US dollar. The chart to the right from Bloomberg shows just how fast the Japanese Yen is falling versus the US dollar; you can see the Yen was trading around 101 from June until mid-August, last week crossing over the 120 to one level, a decline of more than 20 percent in the value of the Yen. While this is great for companies that export goods from Japan it is very hard on the local economy as everything that is imported (many items in Japan) is seeing cost increases well beyond what everyday people can afford.
Commodities were mixed last week as oil continued to slide, while the metals jumped higher:
The overall Goldman Sachs Commodity Index turned in a loss of 2.76 percent last week, while the Dow Jones UBS Commodity Index declined by -0.12 percent. Oil had a pretty tame week considering the news out of Saudi Arabia that the country would not mind seeing oil at $60 per barrel. In total, oil only declined by 0.47 percent during the week. Livestock had a difficult week last week, falling for the third week in a row, this time by nearly three percent. Gold, Silver and Copper all moved higher last week as the appetite for metals seemed to return to the markets. Silver turned in the best performance, gaining more than five percent, while Copper gained 2.3 percent and Gold gained 2.07 percent.
China saw its financial markets jump higher last week for the second week in a row with the Shanghai based SE Composite Index gaining 9.50 percent in one of the largest weekly gains we have seen in the past two years. We have now seen the index increase by more than 18 percent in just the last 2 weeks. The worst performance of the week last week was found in Brazil with the Sao Paulo based Se BOVESPA Index declining by 4.89 percent as the political uncertainty moving into the new term for Dilma Rousseff remains very elevated.
The VIX started out last week moving higher, easily jumping over the average level we have seen over the past year on Monday, only to follow up the move by declining the next four days in a row. The VIX ended the week at the lowest level we have seen in the middle of August, prior to the spike up over 25 during October. In total last week the VIX declined by 11.33 percent. At the current level of 11.82 the VIX is implying a move of about 3.41 percent over the course of the next 30 days. As always, the direction of the move is unknown. Going into the New Year the VIX looks set to be at the lowest level to start a new year since 2007, in a sign that the slow upward move in the US economy may be able to continue well into 2015.
For the trading week ending on 12/5/2014, returns in FSI’s hypothetical models* (net of a 1% annual management fee) were as follows:
*Model performance does not represent any specific account performance but rather a model of holdings based on risk levels that are like our actual holdings, the hypothetical models are rebalanced daily to model targets.
We made no changes to our models over the course of the previous week as the week was sort of a trendless week for many of our holdings. Oil continues to look like a good spot for future investments, but currently it would be like trying to catch a falling knife. It is typically much better to let the knife hit the floor and then pick it up. Our holding in the rising US dollar continues to perform well as do the majority of our other positions. We are still positioned for a market that is far more choppy than it has been recently so we should be well positioned if the market decides to move up or down between now and the end of the year.
Economic News: Last week was all about employment and the slow but steady recovery we have been seeing in the US for the past few years. In total there were two releases that beat expectations, (highlighted in green) and one that significantly missed expectations (highlighted in red below):
Data for table from Econoday.com, Bloomberg and Yahoo Finance
The week started off on Monday with the release of the ISM Index for the month of November, which came in just slightly above market expectations, but it was not enough for the markets to get excited about. On Wednesday the ADP employment change figure gave a misleading number, indicating that fewer jobs than expected had been reported during November. This negative jobs number, however, did not hold through the end of the week. Also during the day on Wednesday the services side of the ISM was released and came in slightly better than anticipated, much like the overall ISM released on Monday. On Thursday the standard weekly unemployment releases held nothing new as both came in very close to market expectations. On Friday the nonfarm payroll numbers, both public and private, beat market expectations and did so by a wide margin. Both figures came in well above 300,000; this was the first reading over 300,000 since June of 2010 on both the public and private payroll figures. When the payroll figures came out there was a collective “wow” on Wall Street as both figures beat expectations by such a wide margin that everyone was caught by surprise. Despite the strong showing on the payroll figures, however, the overall unemployment rate failed to move, staying at 5.8 percent for the month of November, just like it was during October. The labor force participation rate failed to move much, staying at a very low level (62.8 percent), a sign that despite the overall unemployment rate being under six percent the US still has a long way to go to get back to the employment level seen prior to the decline in 2008. Factory orders for the month of October were the sole downer on Friday, coming in well below expectations, with the number actually being a negative 0.7 percent, while expectations had been for a slight increase of 0.2 percent. Factory orders turning negative so close to the holiday shopping season is concerning given that the holiday sales season did not start as strong as many would have liked. Last week wrapped up on Friday with the release of the Consumer Credit report for the month of October, which showed that credit expanded by slightly less than anticipated, but did not slow enough to cause alarm.
This week is a very slow week for economic news releases; the releases highlighted below have the potential to move the overall markets:
Data for table from Econoday.com, Bloomberg and Yahoo Finance
This week starts on Thursday with the release of the standard weekly unemployment related figures, with initial jobless claims expected to have declined a little while continuing jobless claims are expected to have declined by 12,000. The bigger release of the day on Thursday will be the retail sales figure for the month of November, as this release includes Black Friday as well as the first full weekend of the holiday shopping season. Expectations are for a 0.4 percent increase, but with the figures we saw about Black Friday it would not be surprising to see this release significantly miss market expectations. If we get a negative reading on either the overall retail sales or retail sales excluding auto sales figures the market will likely react poorly; at least that is what most people would think it would do. But with the Fed starting to raise interest rates on the horizon, it is anyone’s guess what would happen to a negative print on retail sales. The market might jump higher in anticipation of the poor sales leading the Fed to hold off increasing interest rates a little longer. On Friday the Producer Price Index (PPI) for the month of November is set to be released with expectations of a small decline of one tenth of a percent, due in large part to the continued decline in the price of energy and oil specifically. When energy, food and fuel as well as a few other items are removed from the calculation you arrive at the Core PPI number, a number that is historically much more stable and, this time, is expected to increase by one tenth of a percent. Wrapping up the week on Friday this week is the release of the University of Michigan’s Consumer Sentiment Index, which is expected to increase slightly from 88.8 up to 89.5. If we see a reading of 89.5 it would be the highest reading on the index that we have seen over the past 6 years. With no members of the US Federal reserve expected to make any statements this week, Fed watchers will be watching Europe closely for any type of statements or speeches out of the ECB about what it plans on doing going forward with its bond buying program.
Fun fact of the week: A picture (and accompanying table) can be worth a thousand words!
Source:US Energy Information Administration
While the US is touting energy independence, remember we are far smaller in term of proven oil reserves than many of the oil powerhouses around the world.
Tagged: Bull rally, ECB bond buying, ECB decision, global financial markets, markets trading channel, Oil fall, OPEC, Russia oil pinch