For a PDF version of the below commentary please click here Weekly Letter 5-26-2015

Commentary at a glance:

-The US markets were mixed last week as investors continued to speculate about the Fed.

-The Dow Jones Transport Index continued to struggle last week.

-Is Greece finally out of money? Varoufakis thinks so!

-Forget about a Grexit; we have now moved on to a Brexit.

-Economic news last week, across the board, came in worse than expected.

 

Market Wrap-Up: Last week it seemed the summer trading season started a little earlier than normal. Aside from Fed Chair Yellen giving a speech and a few remaining companies announcing earnings there was very little the market took any notice of during the week. While the three broad indexes were in the upper end of their trading ranges, the VIX continued to move lower, closing the week at the lowest point we have seen since November 2014. The charts below are of the three major US indexes in green with their respective trading ranges drawn by the red lines. The VIX (lower right pane below) is drawn with the index in green and the one year average level of the VIX drawn in red:

4 combined 5-25-15

In looking at the movements of the three major indexes last week the week ended much the same way  it started, with the indexes moving in a sideways direction as they search for reasons to move higher or lower. The S&P 500 (upper left pane above) is the strongest from a technical perspective, followed by the NASDAQ (lower left pane above) and then the Dow (upper right pane above). Despite differences in technical strength all three of the major indexes are very close to the upper bound of their trading ranges. If history continues to play out, the markets could be in for a bit of a move lower as the indices “bounce” off their resistance levels. One of the many factors I watch in assessing the markets is the Dow Jones Transport Index, which I track using an ETF that trades under symbol IYT.

IYT compared to DJ 5-25-15

Most of the time the Transport index moves in tandem with the overall Dow Jones Industrial Average, but at times there are divergences and these are signals that the current environment may be about to change. As you can see in the chart to the right, the Dow Jones Transport index (green line and red trend line) has been losing ground to the overall Dow Jones index (teal line and blue trend line) for the past two months. Historically, a divergence with transports moving lower when compared to the overall index has been indicative of a looming market correction. This is because companies typically ship fewer goods and materials around the country ahead of a slowdown. Take the manufacturing of cars for example. There are a lot of raw materials and parts that need to be shipped from all over to the production facilities to make a car. If a company thinks car sales will decline they will buy and ship fewer raw materials and parts needed to make the cars. They in turn will be turning out and shipping fewer cars. This would be just one micro chasm of the overall US economy and how a slowdown in transportation could mean trouble in the future. Transports can also serve as a positive signal, which would be the case if the Transport index was moving upward, faster than the overall Dow Jones Industrial Average. One of the reasons attributed to the recent weakness we have seen in the Transport index has been the port strikes on the west coast and the inability of companies across the country to get parts unloaded off ships and transported to their necessary locations. I am a little skeptical about this theory as the strike at the west coast ports has now been over for several weeks and we have not seen a rapid increase in the index, as you would expect if there really was a lot of pent-up demand for products to start moving throughout the US once again.

 

 

National News: Other than the tail end of earnings season announcements made sporadically throughout the week last week, the focus of the national news seemed to be on Fed Chair Janet Yellen’s Speech, which she delivered on Friday in Providence Rhode Island. With the topic of her speech being the outlook for the US economy, it was no wonder that Wall Street, at least those who worked all week going into a holiday weekend, paid close attention to what she said in the speech. She started out giving historical information about the Great Recession and the impact that was felt in the greater New England region. She then looked at three headwinds, as she called them, to the economic recovery over the past 7 years. Her three headwinds were the US housing market, fiscal policies and the effects of growth in the US economy on other parts of the world. All three headwinds were likely behind the US economy in her estimation, but that does not mean smooth sailing from here on. She went on in her speech to look at potential issues with the US employment situation as well as the lack of wage growth and stubbornly low rate of inflation. Chair Yellen mentioned the slowing down in the manufacturing sector as well as consumer spending and confidence, but chalked these up to bad timing with the very snowy winter on the east coast and port strikes hampering the economy on the west coast. She said the Fed is seeing economic growth in the US running very slow, about 2.5 percent, for the next couple of years with the unemployment rate in the US moving down to near 5 percent by the end of this year. Finally Chair Yellen got to the part that was most important to the financial markets around the world: when the Fed will start to increase interest rates. Chair Yellen hedged her bets in this section, citing her forecasts (which she admits may be very flawed) and saying that if things go as planned, she thinks it would be appropriate to begin increasing interest rates at some point during this year. She then cautioned that starting to increase rates and getting interest rates back to “normal” levels are two very different things and that this will be very data dependent and that there is no hurry to increase rates quickly. The markets late on Friday had very little reaction to her speech either because very few people were still at work on the East coast or because she said nothing that was new. The odds are still on for the Fed to increase rates this year with the current estimates being about tied between sometime in the third quarter and sometime in the fourth quarter. While the Fed statement provided little new information, the earnings results over the course of the week did hold a few new and interesting tidbits of information.

 

Large retailers were the focus of the earnings releases last week and their results were decidedly mixed. Below is a table of the better known companies that released earnings last week with earnings that missed expectations highlighted in red, while earnings that beat expectations by more than 10 percent are highlighted in green:

 

Advance Auto Parts -4% Gap 0% Salesforce.com 100%
Agilent Technologies -3% Gordmans Stores 167% Sears Holdings pushed
Best Buy 28% Hewlett-Packard 1% Shoe Carnival 2%
Buckle -9% Home Depot 1% Staples 0%
Campbell Soup 22% Hormel Foods 8% Stein Mart 0%
Deere & Co 30% Kirkland’s 45% Target 7%
Dick’s Sporting Goods 0% Lowes -5% TJX Companies 5%
Dollar Tree -4% Red Robin Gourmet Burgers 25% Wal Mart Stores 0%
Foot Locker 5% Ross Stores 7% Williams-Sonoma 9%

 

Wal-Mart released earnings that were exactly in line with expectations on and earnings per share basis last week, but they did turn in lower than anticipated revenues for the quarter, even as the average Wal-Mart customer had more money to spend due to falling gasoline prices and tax refunds. Target turned in a strong quarter, but much like Wal-Mart is seeing a bit more softness in spending than the company would like. Higher end retailers such as Gap and Buckle saw weaker than expected sales as well, leaving many retailers to wonder where US consumers are spending their money, other than the Apple store. Salesforce was a standout performer last week as the company beat earnings expectations by 100 percent, thanks to large scale adoptions of its CRM and cloud based computing platform throughout the quarter.

 

According to Factset Research we have now seen 488 (98 percent) of the S&P 500 companies release their results for the first quarter of 2015. Of the 488 that have released, 71 percent have met or beaten earnings estimates, while 29 percent have fallen short of expectations. This percentage of companies beating expectations on earnings per share was unchanged over the course of the previous week as we are now at the very tail end of earnings season. When looking at revenue of the companies that have reported, 45 percent of the companies have beaten estimates while 55 percent have fallen short. This 45 percent of companies also held steady when compared to two weeks ago, as expected this late into the end of the reporting season. When looking at the historical data, the percentage of companies that have beaten revenue estimates is 58% over the last five years, so this quarter’s 45 percent is significantly below the five year average. In looking at the companies that have given forward guidance for the second quarter of 2015, 74 companies according to Factset have issued negative guidance, while only 27 companies have issued positive forward guidance for the next quarter.

 

Below is a table of the better known companies that will release their earnings this week, with the releases that have the most potential to impact the markets highlighted in green:

 

Autozone Express Seadrill
Big Lots Flowers Foods Splunk
Costco Wholesale Popeyes Louisiana Kitchen Tiffany & Co
DSW Sanderson Farms Toll Brothers

 

After this week there will be fewer than 5 of the S&P 500 component companies left to report earnings for the second quarter of 2015. Retailers once again are the focus of this week’s earnings results with the potentially most impactful one being Costco, as many US small businesses do a significant portion of their shopping at the store. One company that could be interesting to watch this week is Splunk, which is a big data company in the data analysis industry; they turn data points into useful information. Big data and cloud computing are two of the biggest buzz words currently being tossed around in Silicon Valley and Splunk is one of the pioneers in the space, so seeing how successful they have been at monetizing what they do could have ripple effects to other high technology companies.

 

International News: A new term came up in the investment lexicon last week; that being a Brexit (it is not a misspelling). So what is a Brexit? It is just like a Grexit, which is the term coined for Greece potentially leaving the European Union, but the “Br” stands for Britain. “Brexit” is the term being used when someone is talking about Britain leaving the European Union. With the conservative party firmly seated in the British government after the recent election there will now be a referendum held in Britain by 2017 to see if the people want to remain a part of the European Union of if they would like to get away from the 28 member country system. Since Britain has never been on the Euro, there is no great risk to the British currency the Pound, but leaving the EU could present a whole lot of other problems for both people and businesses on both sides of the breakup. Some of you may remember from history class that this type of a break by Britain from the rest of Europe would not be the first of its kind. Henry the VIII broke away from what is now Europe when he broke away from Rome and the Pope back in the 16th century. According to the latest poll data I can find online, the numbers have remained pretty steady over the last month with about 45 percent of the people polled in the UK wanting to stay in the EU, while 36 percent want to leave. The key will be the swing vote as there are about 19 percent that are undecided at the current time. The other big question would be if the UK, led by Britain, votes to leave the EU, does that mean that Wales, Northern Ireland and Scotland must go as well? This is one of the major questions to be addressed prior to any decisions being made. To the financial markets, Britain leaving the EU would likely not be that big of a deal as the country is already on its own currency and can support itself, posing no systemic risk to the overall system in place governing the European Union. However, if Britain leaves it would set a very bad precedent that other strong countries with political factions may try to utilize, countries such as France, Germany and Italy. What it adds right now is yet more uncertainty to the situation in Europe and the global financial markets typically do not like uncertainty. A Grexit is also currently on the table as time looks to be running out for the Greek government to come up with a plan to save their financial crunch.

 

Greece as you know has been in trouble financially for many years and each year the country seems to come right up to the point of a crisis and then kick the can down the road a little further after essentially digging around in the couch and finding enough loose change to make interest payments to their European lenders. Over the weekend Greek Finance Minister Varoufakis announced that Greece does not have the funds needed to make a June 5th payment to the IMF that is due in the amount of 300 million Euros. He said Greece would not be making a payment unless a deal was struck with foreign lenders to free up bailout funds to make the payment. Not long after making the statement he came back and said Greece would make the payments as planned as a deal had been struck with the European lenders. However, there was no information about the deal as far as terms or conditions. At this point, the global financial markets appear to be over the back and forth between Greece and the rest of Europe. This could all change very quickly if Greece actually misses a payment or if a deadline is missed in terms of conditions for receiving funds. It seems it would make more sense for Europe to forgive the portions of the loans that are currently due, rather than move money from one pocket into another and call everything good. Greece will need more funds in the future (probably a few more major bailouts) to fix its situation, so it should be working on that, not messing around with a few hundred million Euros here and there ad nauseum.

 

Market Statistics: Two of the three major indexes moved higher over the course of the previous week, while one moved lower. All three moved on lighter than average volume since last week was the week before the Memorial Day. Volume was especially light on Friday, as mentioned above, as many investment managers and traders took off early and made it a four day weekend rather than the normal extended three day weekend.

 

Index Change Volume
NASDAQ 0.81% Below Average
S&P 500 0.16% Below Average
Dow -0.22% Below Average

 

As mentioned above, all three of the major US indexes are in the upper end of their respective trading ranges and look perfectly content to stay there, as there appears to be little that would push them either higher or lower at this point.

 

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
Healthcare Providers 2.60% Transportation -2.22%
Semiconductors 2.53% Materials -1.64%
Biotechnology 2.51% Energy -1.36%
Pharmaceuticals 1.12% Residential Real Estate -1.34%
Healthcare 1.11% Consumer Staples -1.10%

The sector performance last week on the positive side was what you would expect given the strong relative performance of the NASDAQ compared to the other indexes. Three of the top five sectors last week were heavily technology related with the other two being healthcare related.  On the flip side, as mentioned above, the poorest performing sector last week was the Transportation sector. Typically, this is seen as a leading economic indicator, so this is somewhat of a yellow flag waving around at this point. Consumer Staples was an interesting sector to see on the bottom five performing sectors list as this sector typically does well in a low interest rate environment as investors pile into the stocks in the sector for their yield and perceived safety. Seeing it on the down side leads me to think there was a little bit of a risk on trade being played out last week as investors sold “safe” stocks in favor of something else.

The US fixed income market was mixed last week with the long end of the curve moving lower while short term bonds held their own in light of the Chair Yellen’s speech:

Fixed Income Change
Long (20+ years) -0.98%
Middle (7-10 years) -0.53%
Short (less than 1 year) 0.00%
TIPS -0.19%

The US dollar finally turned around last week, gaining 3.14 percent against a basket of international currencies, ending the weekly losing streak for the US dollar at five consecutive weeks. Much of the rally in the US dollar appeared to be due to the uncertainty surrounding the situation in Greece and Europe as the clock continued to tick down for the Greeks. The Euro was the worst performing of the major global currencies, giving up 3.91 percent against the value of the US dollar. The strongest performing currency of the major global currencies aside from the US dollar was the British Pound (-1.49 percent) as the British seriously appear to be considering leaving the European Union in favor of striking out on their own. Not any time soon, but apparently some of the government economists are looking into how exactly that may play out in a leaked report that was made public last week.

Oil was the only commodity last week that did not move lower as it managed to eke out a very small gain for the week:

Metals Change Commodities Change
Gold -1.64% Oil 0.05%
Silver -2.45% Livestock -0.11%
Copper -4.63% Grains -1.56%
Agriculture -2.03%

The overall Goldman Sachs Commodity Index turned in a loss of 2.11 percent last week with oil nearly flat and many of the other commodities declining by more than two percent. With oil moving higher over the course of the previous week the streak of positive weekly gains on oil has now run out to 10 consecutive weeks; with the total gain during the run up being more than 33 percent. Metals were all lower last week with Gold giving up 1.64 percent, while Silver fell 2.45 percent and Copper fell off the proverbial cliff, declining by 4.63 percent. Soft commodities all moved lower last week as Livestock decreased 0.11 percent, while Agriculture overall decreased 2.03 percent.

On the international front the Chinese market once again moved to the top of the list with the Shanghai based Se Composite Index gaining 8.1 percent over the course of the previous week. This comes as several high profile companies listed in Hong Kong are now under investigation for fraud after they lost tens of billions of dollars in a single trading day and the CEO in one case cannot be found. Brazil was the bottom of the barrel last week, turning in a loss of 5.02 percent on the main Brazilian index, the Sao Paulo based Se BOVESPA index, as uncertainty surrounding the political interactions with the business community in Brazil remain murky at best.

With the markets seeming to be trading without much actual direction, the VIX last week moved lower, but only a little, giving up 2.02 percent over the course of the week.  This decline, however, pushed the VIX to the lowest level we have seen so far during 2015 and the lowest level we have seen since late November of 2014. At the current level of 12.13 the VIX is implying a move of 3.50 percent over the course of the next 30 days. As always the direction of the move is unknown.

For the trading week ending on 5/22/2015, returns in FSI’s hypothetical models* (net of a 1% annual management fee) were as follows:

Last Week Year to Date
Aggressive Model 0.22 % 2.01 %
Aggressive Benchmark -0.21 % 5.23 %
Growth Model 0.15 % 1.12 %
Growth Benchmark -0.17  % 4.10 %
Moderate Model 0.06 % 0.56 %
Moderate Benchmark -0.11 % 2.97 %
Income Model -0.06 % 0.49 %
Income Benchmark -0.05 % 1.54 %

*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 only one change over the course of the previous week and that was to remove our hedging position in our least risk models. We sold Direxion Funds S&P 500 inverse fund, ticker DXSSX, as our signal about overall risk in our low volatility stock basket got a strong boost from some positive earnings results during the course of the week. We kept the proceeds from the sale of the fund in cash as the volume and direction of the market was very uncertain throughout the week heading into a long weekend for the financial markets.

 

Economic News:  Last week saw economic news releases come in very close to expectations almost without exception. There were no releases that missed market expectations by a significant amount and there were no releases that significantly beat market expectations to the upside:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Slightly Positive 5/19/2015 Housing Starts April 2015 1135K 1019K
Slightly Positive 5/19/2015 Building Permits April 2015 1143K 1065K
Neutral 5/20/2015 FOMC Minutes April Meeting
Neutral 5/21/2015 Initial Claims Previous Week 274K 270K
Neutral 5/21/2015 Continuing Claims Previous Week 2211K 2250K
Slightly Negative 5/21/2015 Existing Home Sales April 2015 5.04M 5.24M
Slightly Negative 5/21/2015 Philadelphia Fed May 2015 6.7 8
Neutral 5/22/2015 CPI April 2015 0.10% 0.10%
Neutral 5/22/2015 Core CPI April 2015 0.30% 0.20%

Data for table from Econoday.com, Bloomberg and Yahoo Finance

 

Last week started out on Tuesday with the release of the housing starts and building permits figures, both for the month of April and both coming in slightly better than expected, posting more than 1 million units on each. On Monday the Fed released the latest FOMC meeting minutes and there was little new information included in them. In total it still looks like the Fed is poised to increase interest rates later this year, but such a move will be heavily dependent on data coming into the Fed signaling that it is an okay time to do so. On Thursday the standard weekly unemployment figures were released with both figures coming in very close to expectations, thus not giving any useful information about the current state of the labor market in the US. Also released on Thursday were the latest figures from the Philadelphia Fed’s business conditions index and the existing home sales figures for the month of April. Existing home sales came in just over 5 million units, but that was slightly below estimates of 5.25 million units, not enough of a miss to cause alarm, but certainly not showing strength in the US housing market. The Philly Fed index posted a reading of 6.7, which was worse than the expected 8 and worse than the April reading of 7.5; remember that any reading over zero signifies positive business conditions and expansion. Wrapping up the week last week on Friday was the release of the Consumer Price Index (CPI) and the Core CPI, both of which came in very close to expectations and signaled that inflation is not currently an issue in the US economy. In fact, inflation is running much lower than the Fed would like as its target rate of inflation in the economy remains 2 percent on a year over year basis.

 

With Monday being a holiday there are a number of economic news releases that will be crammed into the four business days of the week this week. The focus of the releases this week will be on the US consumer, both in looking at confidence figures as well as spending. The releases highlighted below have the potential to move the overall markets on the day they are released:

 

Date Release Release Range Market Expectation
5/26/2015 Durable Orders April 2015 -0.60%
5/26/2015 Durable Goods -ex transportation April 2015 0.30%
5/26/2015 Case-Shiller 20-city Index May 2015 4.60%
5/26/2015 New Home Sales April 2015 510K
5/26/2015 Consumer Confidence May 2015 94
5/28/2015 Initial Claims Previous Week 274K
5/28/2015 Continuing Claims Previous Week 2250K
5/28/2015 Pending Home Sales April 2015 1.00%
5/29/2015 GDP – Second Estimate Q1 2015 -0.70%
5/29/2015 Chicago PMI May 2015 53
5/29/2015 University of Michigan Consumer Sentiment Index May 2015 89

Data for table from Econoday.com, Bloomberg and Yahoo Finance

 

This week starts off on Tuesday with the release of the overall durable goods orders for the month of April, which is expected to post a decline of 0.6 percent during the month. Released at the same time is the durable goods orders excluding transportation. This is a better reading of how the US economy is doing when compared to overall durable goods orders since large ticket items such as airplanes, cars and trucks can heavily skew the data on any given month if large corporations are replacing parts of their fleets. When transportation is not included durable goods orders are expected to show a slight increase of less than half of a percent. Also released on Tuesday is more housing data as the Case-Shiller 20-City Home Price index for May and the new home sales figures for April are both set to be released. With the mediocre data we saw last week on the housing figures it does not seem like there will be much surprise to the upside on either of these two releases this week. Later during the day on Tuesday Consumer Confidence, as measured by the government, is set to be released, and expectations are for a slight increase during May when compared to April’s level. This report will need to be taken with a grain of salt as the other non-governmental reports have indicated that confidence is moving lower during the time period. On Thursday the standard weekly unemployment related figures are set to be released with no major changes in either expected. Also released on Thursday is the last of the housing data for the month of April as the existing home sales figures are posted with expectations of a one percent gain over the levels seen in March. On Friday the big release of the week is set to be released, that being the second revision to the GDP estimate of the first quarter of 2015. The first estimate, released a few weeks ago, indicated that GDP expanded by 0.2 percent. Expectations for this release are that the revision will put GDP into contract mode with GDP having fallen by 0.7 percent during the quarter. If we post a negative 0.7 percent it would be seen as negative for the overall health of the US economy, but much of the weakness will likely be blamed on transitory conditions such as bad weather and the port strikes. A print worse than -0.7 could be positive for the markets as most investors could take this to mean the Fed will keep rates lower for longer than current exceptions. A reading better than -0.7 could lead to a negative market reaction as the punch bowl could be pulled away a little earlier than thought. Also released on Friday is the Chicago PMI, which will likely move in line with the Philly index released last week and come in lower than expected. Wrapping up the week on Friday is the release of the University of Michigan’s Consumer Sentiment index for the month of May (final estimate), and expectations are for a reading that is slightly better than the first May estimate, which posted the largest decline since early December of 2012. In addition to the scheduled economic news releases there are also five speeches being given by Federal Reserve officials throughout the week, each of which should hold nothing new, but you never know.

 

Fun fact of the week—British Music

 

 

Have a great week!

For a PDF version of the below commentary please click here Weekly Letter 5-18-2015

Commentary at a glance:

-The US markets advanced last week on weaker than expected economic data.

-When will the Fed increase rates? 2015? 2016?

-Greece short on money once again; who believes them this time around?

-Economic news last week came in worse than expected.

 

Market Wrap-Up: The markets were on the move last week, thanks in large part to weakness seen in the economic data that seems to be pointing toward the Fed holding off on increasing interest rates longer than first anticipated. This means the “punch bowl” of low interest rates may be here to stay a little longer than expected, thus allowing for the markets to push higher as cheap money remains in the system. The charts below are of the three major US indexes in green with their respective wide trading ranges (I tightened the trading ranges a little this week) drawn by the red lines. The VIX (lower right pane below) is drawn with the index in green and the one year average level of the VIX drawn in red:

4 charts 5-18-15

With the latest moves of the market being fueled by potential Fed inaction we saw two of the three major US indexes break above their most recent trading range. From a technical standpoint the S&P 500 (upper left pane above) remains the strongest of the three major indexes as it broke above its trading range and made a new all time high to close out the week. The NASDAQ (lower left pane above) is clearly in second place from a technical standpoint as the index broke above its most recent trading range, but failed to make a new all time high, remaining about 0.85 percent below its high point. The Dow (upper right pane above) remains third in terms of technical strength as the index failed to both make a new all time high and break out of its most recent trading range. While we have technically seen a breakout, it is weak to say the least and would need more of a catalyst to provide much more upside at this point.

 

One such catalyst could be a decline in the price of oil. Last year, as we saw oil prices decline, we saw the financial markets rally with each of the major indexes gaining more than five percent. Oil production has recently been shown to be increasing as demand has remained either flat or slowed slightly. The latest data was out of Saudi Arabia and indicated that oil production during the month of March was the highest they have produced over the past 12 years. In total, oil production increased to 10.29 million barrels per day, an increase of almost 10 percent from February for the amount of oil sold overseas by the kingdom. This action does not seem like an action that would have been taken by a country that wants to see oil prices move higher, but instead by a country that wants oil prices to move lower. Saudi Arabia still seems to be taking aim at the US fracking oil production in an attempt to drive the prices so low that it is not economically feasible for the frackers to drill in the US. The Saudis have taken this type of action in the past and it worked for a short period of time, but in the longer run they will lose the oil dominance they have enjoyed for the past few decades as the US becomes less and less dependent on their oil being on the global markets. If we see an economic slowdown and demand for the oil decline further, combined with continued oversupply, it could lead to significantly lower prices.

 

The second major catalyst that could come into play would be the US consumer and a change in their attitude. Currently consumer sentiment and confidence is falling; we are seeing this both in confidence numbers and in spending habits. Spending has been going down on big ticket items, such as durable goods orders, and retail sales overall have been very soft. Combine this consumer softness with softness in business spending, such as a lack of capital expenditures and buying back shares of the company rather than spending cash on growing the company, and you can see how this quickly becomes a problem for the economy. Already we have seen very weak growth in GDP for the first quarter of 2015 and while the figure could be revised higher it is unlikely to jump upward by much and is more at risk of a downward revision at this point. If the US consumer and corporate America start to spend money at a significantly higher rate we could see the US economy snap back to more normal growth, something that has been lacking this entire bull market cycle since the bottom of the financial markets back in 2009.

 

National News: National news last week focused on the health of the US economy in light of a few key economic data points that were released and the potential impact they may have on the Fed’s decision as to when to increase interest rates. As mentioned below in the economic news section, all but two of the economic news releases that were released last week came in below expectations and in some cases signaled the largest reversal of the indicator in several years. Retail sales were shown to be nearly perfectly flat, a sign that the US consumer is not increasing their spending. This was during a time period when fuel costs were increasing, which means that in order to get flat growth the spending that increased on fuel had to come from a reduction in spending on other items. Manufacturing posted an increase that was less than expected, but at least it was better than the contraction seen during April. The big issue for the Fed will be consumer confidence. Last week it was the University of Michigan’s Consumer Sentiment Index that indicated that the average US consumer is starting to not believe the economic recovery, as shown in the declining sentiment figure. This weakness in the US consumer combined with the unsteady manufacturing data, the slow GDP growth and the general lack of inflation leaves the Fed in a bit of a quagmire as to what to do about interest rates. At this point, if the US economy was running normally and interest rates were at normal levels the Fed may be thinking more about cutting rates than increasing them as they would want to try to boost inflation and get the economy moving forward at a faster pace. But this is not an option at this point as the Fed has its back up against a wall with the zero bound interest rate it is currently running. While there are a few economists out there who think rates will be increased next month, the vast majority of economists think the rate hike will come later this year. There are even some economists and Fed officials who think the Fed should start to increase rates in 2016, once it is certain the economic “softness” is behind us. While everyone is waiting for the Fed decision over the next few quarters, the biggest potential market driver will be earnings season and the first quarter earnings season is quickly drawing to a close.

 

Last week was the start of the end of earnings season for the first quarter of 2015 as there is a precipitous drop off in earnings announcements coming this week. Below is a table of the better known companies that released earnings last week with earnings that missed expectations highlighted in red, while earnings that beat expectations by more than 10 percent are highlighted in green:

 

Applied Materials 4% J C Penney Company 28% Macys -8%
Cisco Systems 0% Jack In The Box 5% Ralph Lauren 7%
Dillard’s -5% Kohls 11% Shake Shack 233%

 

Last week seemed to show that different retailers had very different quarters as the discount retailers Kohl’s and JC Penney had strong quarters while the high end retailers Macy’s and Dillard’s struggled during the quarter. Shake Shack made headlines last week as it beat expectations handedly in its first quarterly report since going public earlier this year. The results boosted the stock for a brief time, but the stock ended lower on announcement day as the growth rate for the company looking into the future looks to be difficult to predict with any accuracy.

 

According to the latest Factset figures, there has been little change in the percentage of companies beating earnings or revenues expectations. Currently, 70 percent of the companies that have released their quarterly results have met or beaten earnings expectations, while 30 percent have missed. When looking at revenues per share, only 36 percent have managed to beat or meet market expectations, while 64 percent have fallen short. One thing to keep in mind is the fact that all of these numbers boil down to a quarter that had expectations so low that it was relatively easy for companies to beat expectations. Overall, earnings for the S&P 500 during the first quarter of 2015 fell by 5 percent when compared to where they were for the fourth quarter of 2015. At this point in the cycle it is becoming more and more difficult for the remaining companies releasing earnings to actually move the needle on the final figures for the quarter. While they could change a little, they are likely to remain very close to where they are currently.

 

This week is all about big box retailers releasing their quarterly results and they could move the market one way or the other depending on the spending by the US consumers during the first quarter of 2015. With consumer confidence slipping it would not be surprising to see the trend we saw last week continue this week with the discount retailers such as Wal-Mart, Ross and TJ MAXX posting a strong quarter, while other higher end retailers such as Best Buy and Gap struggle a little.  Below is a table of the better known companies that will release their earnings this week, with the releases that have the most potential to impact the markets highlighted in green:

 

Advance Auto Parts Gap Salesforce.com
Agilent Technologies Gordmans Stores Sears Holdings
Best Buy Hewlett-Packard Shoe Carnival
Buckle Home Depot Staples
Campbell Soup Hormel Foods Stein Mart
Deere & Co Kirkland’s Target
Dick’s Sporting Goods Lowes TJX Companies
Dollar Tree Red Robin Gourmet Burgers Wal Mart Stores
Foot Locker Ross Stores Williams-Sonoma

 

Home improvement store leaders Lowe’s and Home Depot both release their earnings this week and could provide some insight into the residential housing market as home owners will typically put more money into their homes if they think the prices will appreciate in the future compared to putting less money into their homes if they think prices will depreciate in the future.

 

International News: International news last week was relatively quiet as several key global situations continued to move forward, but there were no major issues that flared up any more than most people were expecting. ISIS continued to make inroads in Iraq as they pushed closer to Baghdad, taking the capital city of the Anbar province Ramadi, which is just 70 miles west of Baghdad. This continuing struggle with ISIS seems not to be affecting the price of oil as much as it once did, primarily because Iraq production had been offline for such an extended period of time that there really cannot be a supply disruption in oil flow out of Iraq. Iran also made a few indirect headlines last week as US President Obama held his Arab Summit at Camp David a few days last week. As many of the Arab countries anticipated when they pulled their heads of state from attending the meeting, the meeting bore very little in terms of deals or agreements and ended up not officially being a waste of time, but seeming like a waste of time for all involved. Iran was the main topic of the meeting and focused on the discontent of the members as most of the Arab members do not approve of the deal the US is attempting to strike with the Iranians over their nuclear ambitions. Aside from the Middle East, Greece was the other hot topic of the week as the country continues to run low on funds.

 

Greece has now officially been low on cash for probably the last 3 years, so I am not sure why now is any different than the past, but the country is really making a lot of noise about running out of cash. Last week Greece was able to pay in full their debt payment due to the IMF, but the payment came at a high cost, as Greece had to tap into an emergency fund held with the IMF and use all of the cash the quasi government entities turned into the central bank over the course of the past three weeks. On Sunday, Greek President Alexis Tsipras announced that Greece does not have the funds to make the payment ($845 billion) to the IMF due at the end of this month. The creditors immediately called this a bluff, which is warranted since Greece has done this several times in the past and each time has found enough money to make the payments. This situation seems to be dragging on, and each time Greece steps closer and closer to an edge it really does not want to step over. A default is now more likely than it has been in the past if for no other reason than Greece makes a misstep and fails to secure money in time to make a payment. Germany and the rest of the Europeans seem to be readying themselves for such an event as they are coming up with plans to allow a default without it necessarily meaning that Greece will be kicked off the Euro and out of the European Union.

 

Market Statistics: All three of the major US indexes moved higher over the course of the previous week, but did so with lighter volume than we have been seeing over the past few months. Volume was especially light on Friday, which could be indicative of what is to come over the summer months when trading seems to slow down a bit.

 

Index Change Volume
NASDAQ 0.89% Below Average
Dow 0.45% Average
S&P 500 0.31% Average

 

With the increases we saw last week, we now have two of the three major US indexes trading above their most recent trading range, as mentioned above. At this point it does not look like a breakout is eminently coming as this is most likely just an expansion of the trading range until we see more than a blip above the trading range.

 

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
Healthcare Providers 2.07% Oil & Gas Exploration -2.22%
International Real Estate 1.70% Energy -1.28%
Aerospace & Defense 1.59% Natural Resources -0.93%
Infrastructure 1.33% Transportation -0.92%
Telecommunications 1.21% Insurance -0.44%

The sector performance last week was a little interesting, particularly on the negative side. Oil turned in a positive week, gaining a little more than one half of one percent, but the oil related industries had a pretty rough week with Oil & Gas Exploration falling by more than 2 percent, while energy overall also declined, giving up 1.28 percent. One sector that continues to underperform and is starting to cause more and more concern is the Transportation sector as this sector is typically a leading economic indicator for the overall health of the US economy. If the transportation sector is having a rough time it typically means people are shipping less and less product. This in turn flows through the economy in a negative way several months down the road. We have been seeing transportation underperform the overall market now for the past 3 months, which is a warning flag for the US economy going forward. On the positive side last week, Healthcare Providers once again made it to the top of the list as they turned in a strong week on the back of some strong earnings. Aerospace and Defense also had a good week as the conflicts in the Middle East look like they will be drawn out for several more months if not years.

The US fixed income market was mixed last week with the long end of the curve moving lower, while the belly of the curve (3-10 year treasuries) increased only slightly:

Fixed Income Change
Long (20+ years) -0.75%
Middle (7-10 years) 0.01%
Short (less than 1 year) -0.01%
TIPS -0.09%

Greece continues to be top of mind for many international fixed income traders despite there being very little actual Greek debt in the global financial markets relative to the other debt that is floating around. The 2-year Greek bonds closed out the week with a yield of more than 21 percent in perhaps what was the strongest showing of concern over the ongoing financial crunch the country is experiencing. With the current situation looking worse and worse in terms of Greece running out of funds it is hard to imagine that there will not be a misstep along the way by the government of Greece. Last week saw the US dollar falling against a basket of international currencies by 1.61 percent in what has turned out to be five consecutive weeks of declines for the global reserve currency. During the course of the week the Euro gained 2.29 percent against the value of the US dollar in what turned out to be a very strong move for the currency that was beaten up heavily during the last part of last year and the first few months of 2015. Aside from the weakness in the US dollar, the weakest performing currency last week was the Japanese Yen, which turned in a gain of 0.40 percent against the value of the US dollar. The decline we have been seeing in the value of the US dollar is tied to the advances we have been seeing in the price of a barrel of oil as the two move at an inverse to each other, historically.

Commodities were positive last week as oil made it nine weeks in a row of advances:

Metals Change Commodities Change
Gold 3.12% Oil 0.51%
Silver 6.28% Livestock 0.21%
Copper 0.33% Grains 1.01%
Agriculture 1.48%

The overall Goldman Sachs Commodity Index turned in a gain of 1.16 percent last week as oil rallied for the ninth week in a row, gaining 0.51 percent. Oil is now up more than 33 percent over the course of the past nine weeks. This move comes despite the increase in oil production we have been seeing in several key countries as well as the slowing demand worldwide, according to the last few reports. Metals were all higher last week with Gold gaining 3.12 percent, while Silver sky rocketed 6.28 percent and Copper gained the smallest amount, advancing only 0.33 percent. Soft commodities all moved higher last week as Livestock increased 0.21 percent, while Agriculture overall increased 1.48 percent. Much of the moves in the commodity markets were due to increasing demand around the world.

On the international front, Russia once again made headlines, only this time they were positive as the MSIC Russia Capped Index turned in the best performance of the week, gaining 2.50 percent. After being the best performing index two weeks ago, the main German index, the Frankfurt based DAX Index, declined by 2.24 percent, nearly the identical amount it increased by two weeks ago. Much of the movement on the DAX was due to the ongoing concerns over the state of Greece and the chance that Greece may default on some of its debts in the very near future.

With the markets moving higher last week it was not surprising to see that the VIX pushed lower as it continues to plow ahead and push toward new lows for 2015. Last week it gave up 3.73 percent. We almost got to a new low point for 2015 as we are only a few tenths of a percent from the low point reached on April 24th. So while the markets look like they are very expensive and long overdue for a correction, the VIX appears to be signaling that the markets will muddle along and push either slightly upward or continue to chop in a relatively narrow trading range. At the current level of 12.38 the VIX is implying a move of 3.57 percent over the course of the next 30 days. As always the direction of the move is unknown.

For the trading week ending on 5/15/2015, returns in FSI’s hypothetical models* (net of a 1% annual management fee) were as follows:

Last Week Year to Date
Aggressive Model 0.63 % 1.79 %
Aggressive Benchmark 0.63 % 5.49 %
Growth Model 0.57 % 0.96 %
Growth Benchmark 0.49  % 4.28 %
Moderate Model 0.50 % 0.50 %
Moderate Benchmark 0.35 % 3.08 %
Income Model 0.48 % 0.55 %
Income Benchmark 0.18 % 1.59 %

*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. We remain cautious in our least aggressive models and fully invested in our most aggressive models. Having made it though earnings season on all but two of the companies that we own, it looked like a pretty strong earnings season for our individual equity holdings. Where there were problems, they do not seem structural, and in many cases were due to circumstances outside of management’s control, such as the strength of the US dollar hurting foreign sales as earnings are brought back to the US.

 

Economic News:  Last week there seemed to be no good news in any of the economic news releases as nearly every release missed expectations. There was one release that missed market expectations by a significant amount and no releases that significantly beat market expectations to the upside:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Slightly Negative 5/13/2015 Retail Sales April 2015 0.00% 0.20%
Slightly Negative 5/13/2015 Retail Sales ex-auto April 2015 0.10% 0.40%
Neutral 5/14/2015 Initial Claims Previous Week 264K 275K
Neutral 5/14/2015 Continuing Claims Previous Week 2229K 2300K
Slightly Negative 5/14/2015 PPI April 2015 -0.40% 0.20%
Slightly Negative 5/14/2015 Core PPI April 2015 -0.20% 0.10%
Slightly Negative 5/15/2015 Empire Manufacturing May 2015 3.1 4
Negative 5/15/2015 University of Michigan Consumer Sentiment Index May 2015 88.6 96

Data for table from Econoday.com, Bloomberg and Yahoo Finance

 

Last week’s economic releases started on Wednesday with the announcement of retail sales for the month of April, which missed expectations, both including and excluding auto sales. Expectations were for very slow growth overall at 0.2 percent, but the release showed even less growth coming in with a zero. When auto sales were excluded from the calculation the number only improved to 0.1 percent growth, still far below expectations; both figures are not positive developments for the overall health of the US economy. On Thursday the standard weekly unemployment reports came in with figures that were slightly better than expected, but not by enough for the markets to really take notice. Also released during the day on Thursday was the latest figure for the Producer Price Index (PPI), which showed that prices at the producer level fell by 0.4 percent during the month of April. This is despite the price of oil increasing by more than 25 percent during the month. The core PPI figure also fell and came in below expectations. On Friday the Empire Manufacturing index indicated that manufacturing in the greater New York City area grew during May, but did so at a slower pace than was anticipated. The big news of the day on Friday was the largest miss on the release of the University of Michigan’s Consumer Sentiment Index since early December of 2012.  Expectations had been for little change from the 95.9 that we saw at the end of April, so this release really caught many economists by surprise. We have been seeing the other information about the US consumer deteriorate, but it seems no one thought the sentiment index would have declined by such a large amount over such a short period of time. This is a major red flag for the overall health of the US economy and could present a problem going forward for the retail industry as it gets closer to closing out the second quarter of 2015.

 

This week is a relatively slow week for economic news releases, with the focus of the releases being on the US housing market. The releases highlighted below have the potential to move the overall markets on the day they are released:

 

Date Release Release Range Market Expectation
5/19/2015 Housing Starts April 2015 1019K
5/19/2015 Building Permits April 2015 1065K
5/20/2015 FOMC Minutes April Meeting
5/21/2015 Initial Claims Previous Week 270K
5/21/2015 Continuing Claims Previous Week 2250K
5/21/2015 Existing Home Sales April 2015 5.24M
5/21/2015 Philadelphia Fed May 2015 8
5/22/2015 CPI April 2015 0.10%
5/22/2015 Core CPI April 2015 0.20%

Data for table from Econoday.com, Bloomberg and Yahoo Finance

 

This week’s economic releases start on Tuesday with the release of the housing starts and building permits for the month of April. Expectations seem a little high on these two releases with both expected to post over 1 million units. With the wild weather we saw in some of the central states during the month it seems like housing starts and building permits may disappoint this week. On Wednesday the Fed releases the latest FOMC meeting minutes from its April meeting and, as usual, there will be little new information and the minutes are unlikely to contain anything that is ground breaking. On Thursday the standard weekly unemployment related figures are set to be released with expectations that both figures will have increased slightly over the course of the past week. Also released on Thursday are the existing home sales figures for the month of April and the Philadelphia Fed Business Conditions index for the month of May. The existing home sales figure will likely come in fairly strong as we have now officially entered the spring home buying season throughout much of the US. The Philadelphia Fed Business Conditions index will be very closely watched to see if the downward trend that we saw develop in the Empire Manufacturing index released last week and in the poor consumer sentiment index has any carry over into the greater Philadelphia area. Wrapping up the week on Friday is the release of the Consumer Price Index (CPI) for the month of April. Overall the CPI is expected to show that prices at the consumer level will have increased slightly (0.1 percent), while the Core CPI is expected to have increased by 0.2 percent. If these numbers do pan out it certainly will not be indicative of inflation; something the Fed is watching for very closely and has yet to see in the data. This could be one of the driving factors behind the Fed keeping rates lower for longer than many people are expecting. In addition to the above mentioned economic releases the Fed only has one official on the speaking circuit next week as Chicago Fed President Evans is scheduled to give speeches on both Monday and Wednesday; it is highly unlikely that he will say anything that is not already well known.

 

Fun fact of the week—Eating in Iraq

 

It is not considered rude in Iraq to eat food quickly or without utensils. In fact, it is a sign to the host or hostess that the food is delicious. Iraqis are also extremely offended if the family pet comes near the table during the meal.

 

Source: Augustin, Byron Iraq: Enchantment of the World. 2006

For a PDF version of the below commentary please click here Weekly Letter 5-11-2015

Commentary at a glance:

-The US markets were mixed last week with two indexes moving higher and one lower.

-The US Congress passed a budget for the first time since 2009 last week!

-China cuts interest rates for the third time in six months—attempting to boost growth.

-Economic news last week was better than expected, but not as good as at first glance.

 

Market Wrap-Up: The weakest of the major indexes two weeks ago turned in the strongest performance of the week as the Dow pushed noticeably higher. All three indexes, however, ended the week without successfully breaking out of their previous trading ranges, remaining in a range bound state. The VIX, on the other hand, fell dramatically on Friday, easily breaking through the 52-week average level of the VIX. The charts below are of the three major US indexes in green with their respective wide trading ranges drawn by the red lines. The VIX (lower right pane below) is drawn with the index in green and the one year average level of the VIX drawn in red:

4 charts 5-11-15

Currently, the strongest of the three major US indexes is the S&P 500 (upper left chart above) after overtaking the NASDAQ (lower left chart above) for the top spot last week. Earnings season has been the driving force behind the recent relative strength on the S&P 500 and lack of strength in the NASDAQ. However, even the S&P 500 is currently stuck within its most recent trading range as the markets continue to move in a sideways fashion, as they have been doing for the past three months. The Dow (upper right chart above) is also arguably stronger from a technical standpoint than the NASDAQ when looking at recent performance, but it too has failed to break out. The driving force behind the market movements last week was the employment data released throughout the week by various sources, the biggest of which was the employment figures from the government released on Friday.

 

On Friday the government released its latest figures for the nonfarm public and private payroll figures as well as the overall unemployment rate in the US during the month of April, in addition to the latest labor force participation rate figure also for April. Starting with the good news, the unemployment rate in the US declined from 5.5 percent down to 5.4 percent. More good news was the fact that the nonfarm public payrolls figures came in at 223,000, a full 10,000 higher than was expected. Private payroll figures also came in better than expected at 213,000 versus expectations of 205,000. However, there was a little bit of a dark cloud over the payrolls figures as the figures for the month of March were revised downward and in a very large way. You may remember that March had some dismal jobs growth numbers with public payrolls only increasing by 126,000 and private payroll figures only increasing by 129,000. These two figures look great compared to the revised numbers that came out Friday. On Friday, revisions were made to the March figures and the public payroll figure was taken down to only 85,000 and the private payrolls figure all of the way down to 94,000 new jobs. These are both very large revisions. In fact, they are the largest downward revisions I could find looking back over the past few years. The new actual numbers show that the labor market is much weaker than it appeared at first glance a month ago. So how did the overall unemployment rate still move down during both March and April? The major factor in both months is that the labor force participation rate has recently been moving lower and is currently at a nearly 27 year low, as depicted in the chart below pulled from the Bureau of Labor and Statics website. As you can see in the chart to the right, the labor force participation rate has been steadily declining since the Great Recession of 2008 and it does not look like there will be any change coming any time soon. If more and more people drop out of the labor force, in theory the unemployment rate can continue to decline as they are “no longer looking” for work and do not count as unemployed. This is one of the reasons the Fed remains very cautious about when to start increasing interest rates and it is one of the most puzzling factors the Fed is watching.

Labor force participation 5-11-15

National News: National news last week focused primarily on earnings season as it was a very busy week, but there were a few other headlines the market took notice of during the week. One of those headlines was the fact that the US Senate passed a budget, the same budget the House of Representatives passed two weeks ago. Why is this important? It is important because this is the first time a budget has been passed by both houses in Congress since October of 2009. Does this mean things will start working well on Capitol Hill for the remainder of the term? Probably not. While a budget was passed, the budget has been described as “having no teeth,” meaning there are no penalties for overspending in nearly all areas. So while the headlines look good, it will be business as usual in Washington DC as the spending measures start to roll out. Since there is no problem going over budget, we will likely see another out of balance year as the US government spends more than it receives. With the passage of the budget Congress can now get to work on the reconciliation process, which will be long and arduous. Remember that budgets do not have to be signed by the President, but spending bills do, so there will likely be much fighting upcoming between the Republicans and the President over spending as Republicans will try to tie several items together, such as defunding Obamacare and increasing spending for the military and Homeland Security, an action that will pretty much force the President to veto the measure. Once spending bills have been vetoed it is highly unlikely the Republicans will have enough consensus votes to override a Presidential veto so they will likely have to start again.

 

Last week was the start of the end of earnings season for the first quarter of 2015 as there is a precipitous drop off in earnings announcements coming this week. Below is a table of the better known companies that released earnings last week with earnings that missed expectations highlighted in red, while earnings that beat expectations by more than 10 percent are highlighted in green:

 

3D Systems 50% Estee Lauder 41% Noble Energy 0%
Allstate 5% Groupon 0% Noodles & Co -40%
AOL 0% Hain Celestial Group 0% Office Depot 0%
Aqua America 4% Hyatt Hotels -39% Papa John’s 6%
Archer Daniels Midland 8% Jack Henry & Associates 2% South Jersey Industries -54%
Avis Budget 21% Kate Spade 50% Sprint -50%
Babcock & Wilcox 7% Kellogg 7% Sprouts Farmers Market -7%
Bloomin’ Brands 0% Keurig Green Mountain -2% Sturm Ruger 27%
Church & Dwight 3% Loews -5% Tesla Motors 14%
Comcast 7% Marathon Oil 20% Tyson Foods 3%
Crocs 167% Metlife 2% Walt Disney 11%
DIRECTV -5% MGM Resorts 86% WebMD Health 14%
Electronic Arts 93% Molson Coors Brewing 7% Wendys 20%
Energizer 15% News Corp -29% Whole Foods Market 2%

 

Last week’s earnings announcements seemed pretty random as far as which companies beat and which missed expectations. Electronic Arts had a great quarter on the back of strong video game sales and beat expectations by nearly 100 percent. Walt Disney also turned in a very strong quarter thanks in large part to the Frozen merchandise line of products that are still selling strong after more than 15 months since the release of the movie. Tesla turned in a strong quarter thanks to a large number of their Model S vehicles with all wheel drive being sold during the quarter and the pre orders for their upcoming Model X. But, surprisingly, the quarterly call also had a lot to do with the new battery business Tesla is moving into with the gigawatt factory that is currently under construction in New Mexico. This is being seen as a completely new business line for the company and potentially more lucrative from a financial stand point than the vehicle sales. We will have to wait and see how this all plays out for the company.

 

According to Factset Research, we have now seen 447 (89 percent) of the S&P 500 companies release their results for the first quarter of 2015. Of the 447 that have released, 71 percent have met or beaten earnings estimates, while 29 percent have fallen short of expectations. This percentage of companies beating expectations on earning per share was unchanged over the course of the previous week and is a signal that we are finally nearing the end of the earnings season. When looking at revenue of the companies that have reported, 45 percent of the companies have beaten estimates, while 55 percent have fallen short. This percentage, unlike the earnings per share figure, slipped a little last week, giving up one percent, falling from 46 percent two weeks ago to 45 percent at the current time. When looking at the historical data, the percentage of companies that have beaten revenue estimates is 58% over the last five years, so this quarter’s 45 percent is significantly below the five year average. At this point in the earnings reporting season it would be difficult for the figures to change significantly as we have now see nearly 90 percent of all companies report their earnings.

 

The drop off in the number of companies announcing their quarterly results for the first quarter of 2015 is finally upon us, as there are only nine well known companies releasing earnings this week after a hectic past three weeks that saw the majority of companies announce. Below is a table of the better known companies that will releases their earnings this week, with the releases that have the most potential to impact the markets highlighted in green:

 

Applied Materials J C Penney Macys
Cisco Systems Jack In The Box Ralph Lauren
Dillard’s Kohls Shake Shack

 

This week the focus of the earnings reports will be on the retail industry as five of the nine well known companies releasing earnings are retail focused; some higher end companies like Macys and Ralph Lauren and a few discount retailers like JC Penney and Kohls. Shake Shack will be closely watched by the street this week as the company went public during the first quarter of 2015 and at one point during the quarter the stock price was up as much as 50 percent, prior to selling off a little so far during May.

 

International News: International news last week seemed to focus on two very different areas of the world; one being Europe and the other being China. In Europe, the UK had its big elections last week, during which the conservative party won a majority of the government seats, despite the media going into the election saying it was going to be too close to call as to who would win. David Cameron will remain the Prime Minister of the country and with the election results knows that he has the will of the majority of citizens behind his political actions. With the results of the election so lopsided it was not surprising to see that the British Pound rallied a lot during the week, turning in one of the best single week movements for the currency in the past few months. The financial market in the UK jumped higher with banking leading the way as the conservative government remaining in control likely means less regulations and controls from the government, which is taken to mean more profits for corporate share holders. Energy shares also performed very well in the aftermath of the election results as the fears of energy price freezes the liberal candidates had been pushing for are now all but off the table with the conservative government in control. The conservative government being in control also means that the rest of Europe should not look for a hand out from the UK to fix their financial mess as the UK will likely be perfectly comfortable taking a wait-and-see approach rather than jumping into the thick of the problems. In another part of the world, China made headlines very late last week. In fact, the headlines broke over the weekend here in the US.

 

China recently announced that it cut its key interest rate for the third time in the last six months. China cut the one-year loan rate down to 5.1 percent and the one year deposit rate down to 2.25 percent from 2.5 percent. While the individual move may not seem like much, the fact that it is the third in a string of moves makes it a little more important. The reason for the move is that the government in China really wants to get its economy expanding at a faster rate than the currently predicted 7 percent that is now expected during 2015. The quagmire that the Chinese government currently finds itself in is the fact that while the economy is slowing down, the growth rate in the financial markets in China has positioned them as some of the hottest markets in the world, leading to gains of more than 100 percent over the course of just the past year. It is a very delicate balancing act the government has to follow currently as it tries to pump up the economy while letting the air slowly out from the financial markets balloon that has inflated far too fast. The other interesting headline on the international front that came out last week had to do with President Obama and Saudi Arabia, who are in a little political tiff at the moment. The Arab summit is being held in Washington DC this week and was designed and hosted by the US to gain support from the Arab leadership for the actions the US is taking with Iran. Initially, all of the leaders were expected to be at the meeting and it was going to be a productive meeting, but then King Salman of Saudi Arabia pulled out of the meeting at the last minute. His departure from the meeting and announcement that he was sending one of the Princes in his place caused Bahrain to announce that it too would not be sending its King to Washington DC this week. There are still two other countries that have yet to formally announce if their rulers would be in attendance, but at this point the summit is taking place without the key rulers from the Arab region, which is a huge slap in the face to US foreign policy in the region.

 

Market Statistics: We have finally broken the chopping trend that has been in place for several weeks, at least partially. The Dow and the S&P 500 continued the trend, pushing higher last week, but the NASDAQ declined in performance for the second week in a row.

 

Index Change Volume
Dow 0.93% Average
S&P 500 0.37% Average
NASDAQ -0.04% Above Average

 

As mentioned above, all three of the major indexes remain in their respective trading ranges and we have seen a little weakness relative to the other indexes from the NASDAQ, which prior to last week had been outpacing the other two indexes almost every week.

 

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
Biotechnology 2.37% Telecommunications -3.05%
Financial Services 1.99% Oil & Gas Exploration -2.35%
Regional Banks 1.72% Natural Resources -1.63%
Financials 1.71% Energy -1.26%
Home Construction 1.41% Utilities -1.03%

With earnings season running full tilt last week the top and bottom performing sectors moved a lot from one week to the next. Biotechnology went from being the worst performing sector of the markets two weeks ago, after declining 5.42 percent, to being the best performing sector last week, gaining 2.37 percent. On the flip side, the earnings announcements were not so positive for the energy and oil and gas sectors, which went from being the two top sectors two weeks ago to two of the bottom five sectors last week. This flip flopping of sectors is currently making any sort of relative strength investing investors try to utilize very difficult since the swings are so drastic from week to week in sectors that typically form some of the best short and longer term trends in the markets.

The US fixed income market continued to trend lower last week as uncertainty over when the Fed will start to increase interest rates increased once again on the back of the April Jobs report that was released on Friday:

Fixed Income Change
Long (20+ years) -1.20%
Middle (7-10 years) -0.06%
Short (less than 1 year) 0.02%
TIPS -0.56%

Greece also had a bit of an impact on the global fixed income market last week as it managed to make the payments that were due last week and looks to have found the cash for another IMF payment due to take place this Tuesday. With the conservative party winning an outright majority in the UK elections that took place last week, it was not surprising to see that the British pound was the top performing currency globally last week. During the course of the week the Pound gained 1.96 percent against the value of the US dollar, in what turned out to be one of the strongest moves for the pound so far this year. The weakest performing currency last week was the Euro, which turned in the worst performance of any of the major currencies last week, aside from the US dollar, as the Euro gained 0.06 percent against the value of the US dollar.

Commodities overall were mixed last week as oil made it four weeks in a row of advances:

Metals Change Commodities Change
Gold 0.79% Oil 0.41%
Silver 1.87% Livestock 2.40%
Copper -0.45% Grains 0.84%
Agriculture 1.54%

The overall Goldman Sachs Commodity Index turned in a loss of 0.23 percent last week as oil rallied for the fourth week in a row, gaining 0.41 percent. Oil is now up close to 15 percent over the course of the past four weeks, with much of the move being due to uncertainty surrounding the situation in several Middle Eastern countries, despite a cease fire that Saudi Arabia has agreed to with the Rebels in Yemen. Metals were mixed last week with Copper being the only declining metal, which is understandable after the more than 7 percent jump higher we saw two weeks ago. Gold advanced by less than one percent, while Silver increased nearly two percent during a week of heavy commodity trading volume. Soft commodities all moved higher last week as Livestock increased 2.4 percent and Agriculture overall increased 1.54 percent.

On the international front, Germany turned in the best performance of any of the global indexes with the Frankfurt based Dax Index increasing by 2.23 percent over the course of the week. The worst performing index last week was found in China after government officials said the markets looked like they had gotten ahead of themselves. The Shanghai based Se Composite Index declined by 5.31 percent in what is the first weekly decline on the index since the end of February and the worst weekly drop since the first week of February 2010. Maybe this decline in the markets is what prompted the drop in interest rates that was announced over the weekend, as mentioned above in the international section of this commentary.

After looking like we may finally see the VIX close above the 52-week average level of the VIX for the first time in more than a month going into Friday last week, the VIX turned around and fell like a rock on Friday, giving up 15 percent during the single day. We are now almost exactly at the level we were to start the week last week and down in the lower end of the recent trading range for the VIX. The markets continue to seem to be putting all of the possible negative events that could happen to the financial markets around the world on hold and firmly believing that the markets will continue to climb the proverbial wall of worry. At the current level of 12.86 the VIX is implying a move of 3.71 percent over the course of the next 30 days. As always, the direction of the move is unknown.

For the trading week ending on 5/8/2015, returns in FSI’s hypothetical models* (net of a 1% annual management fee) were as follows:

Last Week Year to Date
Aggressive Model 0.11 % 1.14 %
Aggressive Benchmark 0.23 % 4.79 %
Growth Model 0.00 % 0.38 %
Growth Benchmark 0.18  % 3.77 %
Moderate Model -0.13 % -0.01 %
Moderate Benchmark 0.13 % 2.72 %
Income Model -0.26 % 0.06 %
Income Benchmark 0.07 % 1.41 %

*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 only one change to our models over the course of the previous week as we lowered our overall exposure to the markets in our least aggressive models. We did this by purchasing an inverse fund that moves up when the market goes down and down when the market moves higher. The purpose of this hedging position is to offset some of the risks we have been seeing recently in our stock holdings. Rather than selling our stock holdings and incurring transactions fees and potentially booking taxable gains we decided to add this single position that effectively has the same impact on the portfolio. We continue to watch positions such as oil and energy for an entry point, but it currently looks like they are just as likely to move down from here as they are to continue moving higher.

 

Economic News:  Last week was a busy week for economic news releases with the focus of the week being on employment in the US. There were no releases that missed market expectations by a significant amount or significantly beat market expectations to the upside:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Neutral 5/4/2015 Factory Orders March 2015 2.10% 2.10%
Slightly Positive 5/5/2015 ISM Services April 2015 57.8 56.4
Neutral 5/6/2015 ADP Employment Change April 2015 169K 189K
Neutral 5/7/2015 Initial Claims Previous Week 265K 280K
Neutral 5/7/2015 Continuing Claims Previous Week 2228K 2300K
Neutral 5/7/2015 Consumer Credit March 2015 $20.5B $16.0B
Slightly Positive 5/8/2015 Nonfarm Payrolls April 2015 223K 213K
Slightly Positive 5/8/2015 Nonfarm Private Payrolls April 2015 213K 205K
Neutral 5/8/2015 Unemployment Rate April 2015 5.40% 5.40%

Data for table from Econoday.com, Bloomberg and Yahoo Finance

 

Last week started on Monday with the release of the Factory orders data for the month of March, which came in exactly at market expectations, signaling a slight increase over the February levels. On Tuesday the Services side of the ISM index was released and came in slightly above the market expectations, moving opposite of the overall ISM index, which was released two weeks ago and underperformed compared to expectations. On Wednesday the ADP employment change figure for the month of April was released and missed expectations by 20,000 jobs, but that did not deter people from thinking that the employment figures at the end of the week would be strong. On Thursday the standard weekly unemployment figures were released with both figures coming in close, but a little better than the market had been anticipating. On Friday the numbers everyone had been waiting all week for were finally released, the unemployment figure and payrolls data from the government. All of the numbers looked relatively good on the surface as nonfarm public and private payrolls figures beat estimates and the unemployment fell from 5.5 percent in March down to 5.4 percent in April. But not everything about the release was as positive as it looked; the nonfarm payrolls for the month of April were revised down from 126,000 in March down to only 85,000 during March, making March the worst month for jobs growth since January of 2014. Nonfarm private payrolls were also revised lower from 129,000 in March down to a revised 94,000 during March. This is not the type of revision that would lead anyone to think the jobs market is very strong at this point. One other piece of information in the government reports on Friday was the labor force participation rate, which I mentioned above with an accompanying chart. It was downright dismal on Friday, showing 62.8 percent, which is right at the lowest level since the late 1970’s. This weakness in the labor force is something the Fed is going to have to consider more so than the top line unemployment rate figure as it moves forward in deciding when to increase interest rates.

 

This week is a relatively slow week for economic news releases, with the focus of the releases being on the employment market in the US. There are no releases below that have the potential to move the overall markets on the day they are released:

 

Date Release Release Range Market Expectation
5/13/2015 Retail Sales April 2015 0.20%
5/13/2015 Retail Sales ex-auto April 2015 0.40%
5/14/2015 Initial Claims Previous Week 275K
5/14/2015 Continuing Claims Previous Week 2300K
5/14/2015 PPI April 2015 0.20%
5/14/2015 Core PPI April 2015 0.10%
5/15/2015 Empire Manufacturing May 2015 4
5/15/2015 University of Michigan Consumer Sentiment May 2015 96

Data for table from Econoday.com, Bloomberg and Yahoo Finance

 

This week starts out on Wednesday with the release of retail sales for the month of April, which was expected to show very tepid growth of 0.2 percent overall, while being only 0.4 percent when excluding auto sales. We need to see a pickup in retail sales if we are truly going to get behind the economic recovery many economists are continually talking about. On Thursday the standard weekly unemployment related figures are set to be released with expectations that both figures will have gone up slight over the course of the previous week. Also released on Thursday is the Producer Price Index (PPI), which is expected to show that prices at the producer level increased ever so slightly during the month of April. The Core PPI figure is expected to show an even smaller, but still positive, gain during the month. On Friday the latest Empire manufacturing index for the month of May is set to be released with a reading of only 4 being expected. This figure is very close to the inflection point of 0, but a noticeable improvement from the -1.19 we saw during April for the same economic indicator. Wrapping up the week on Friday this week is the release of the University of Michigan’s Consumer Sentiment Index for the month of May (first estimate) and expectations are for no change over the level we saw at the end of April. With only one fed official giving a speech this week it will be a pretty boring week on the economics front after such an exciting week last week.

 

Fun fact of the week—The great Frozen business.

 

According to the quarterly conference call that took place last week, Chief Operating Officer Tom Staggs of Disney said that sales of Frozen merchandise is current running 10 times higher this year than the same time last year. That amounts to $971 million during the first quarter of 2015 alone. Not bad for merchandise from a movie that was released in late 2013. Just in case you were wondering, the Elsa merchandise continues to outsell Anna merchandise and more than 3 million dresses have been sold across the US market.

 

Source: Walt Disney First Quarter earnings call

For a PDF version of the below commentary please click here Weekly Letter 5-4-2015

Commentary at a glance:

-After making a new all time high two weeks ago the NASDAQ reversed course and moved lower.

-Poor economic data points to Fed waiting on raising rates.

-Coming down to the wire on Greece yet again.

-Economic news last week was weak as growth in the US slowed.

 

Market Wrap-Up: All three of the major US indexes moved lower last week and choppy market movements continued. This time last week the NASDAQ was celebrating having just made a new all time high; this week it looks to have fallen all of the way back into its most recent trading range. The charts below are of the three major US indexes in green with their respective wide trading ranges drawn by the red lines. The VIX (lower right pane below) is drawn with the index in green and the one year average level of the VIX drawn in red:

4 charts 5-4-15

After starting the week well above its most recent trading range the NASDAQ (lower left pane above) fell from its high tower and easily broke back through the upper edge of the trading range. The index then attempted to break back above the range, but fell short, ending the week nearly on top of the upper bound of the range. The spike over the past two weeks on the NASDAQ was likely due to market participants pushing many of the technology stocks higher on the hopes that the index would make a new all time high, which it did. Now it is back to reality for the index. The S&P 500 (upper left pane above) also recently made an attempt to break through the upper edge of its trading range and failed to do so, bouncing off to the downside. The Dow (upper right pane above) was the only index of the three last week that made no attempt whatsoever at breaking through its most recent trading range to the upside, sitting solidly in the middle of its trading range. While the equity indexes were moving around last week, so too was the VIX (lower right pane above) as it made a daring jump higher mid week to the average level of the VIX over the past year, only to fall spectacularly on Friday, giving up more than 13 percent in just the single day. At this point it looks like the markets will continue to move in their sideways direction as they have been for the past three months.

National News: National news last week was not solely focused on the earnings season; the Fed meeting and economic data released stole the spotlight.  The Fed held one of its FOMC meetings last week on Tuesday and Wednesday and released its interest rate decision on Wednesday. The Fed decided to take no action, leaving the Fed funds rate at between zero and 0.25 percent. This decision, however, was released just a few short hours after the announcement by the US Department of Commerce that the GDP for the US during the first quarter of 2015 grew by only 0.2 percent. This was far slower than the expected 1 percent growth and the fourth quarter reading of 2.2 percent. Below is a chart from Investing.com that shows the drop off we have seen in GDP over the past 5 months:

GDP change 5-4-14

As you can see, over the past five months the GDP figure for the US has been steadily declining. With the first estimate for the first quarter of 2015 being so close to zero it would not be surprising to see the revised figure come in even lower and potentially signal an economic contraction in the US. This data throws yet one more curve ball at the Fed as it tries to determine the time to start increasing interest rates in the US. Typically when GDP is weak the Fed would be taking the opposite policy in an effort to stimulate economic growth. However, with interest rates already at zero the Fed would find it very difficult to lower rates and stimulate the economy without some massive round of quantitative easing, much like the one the Fed recently finished. The other big piece of the puzzle—unemployment— will see some data updated this week as the government releases its final figures on the unemployment rate as well as the payroll figures for the month of April. The data at least thus far seems to be signaling that the Fed will have to push back the first rate increase since 2008 until the last half of 2015, if the rates can even be increased at all during 2015. As Fed Chair Yellen keeps saying, the Fed will be data dependent and if the data is mixed, meaning unemployment is doing well while the economy and inflation are faltering, the Fed will side on waiting to increase rates as an economic slowdown is much harder to fix than a relatively normal unemployment rate. While all of this was going on, earnings season was also plowing ahead and the numbers continued to slide as they have been during the past few weeks.

 

Last week was perhaps the busiest week for earnings announcements of the season with many well known companies releasing their results. Below is a table of the better known companies that released earnings last week with earnings that missed expectations highlighted in red, while earnings that beat expectations by more than 10 percent are highlighted in green:

 

Aetna 22% Conoco Phillips 5% Lexmark International 3% Starwood Hotels 14%
Aflac -1% Cooper Tire & Rubber -9% LinkedIn -500% Time Warner Cable -12%
American Tower -15% Crocs pushed Marathon Petroleum 9% T-Mobile -29%
Anthem 17% CVS Health 6% Marriott International 4% Tuesday Morning 0%
Apple 6% Eastman Chemical 14% Martin Marietta Materials -22% Twitter 5%
Aptargroup 13% Equity Residential -1% MasterCard 14% United Parcel Service 3%
Arrow Electronics 1% Exxon Mobil 46% Mylan pushed United States Steel -127%
Ball -13% Ford Motor -8% New York Times 38% Valero Energy 7%
Big 5 Sporting Goods 27% General Dynamics 10% Northrop Grumman -5% VF 0%
BorgWarner -7% Gilead Sciences 4% Owens & Minor 0% Visa 2%
Buffalo Wild Wings -8% Goodyear Tire & Rubber 20% Panera Bread -2% Waste Connections 0%
Cardinal Health 3% GoPro 38% Pfizer 2% Waste Management 0%
Chevron 85% Helen of Troy 32% Phillips 66 8% Western Digital -3%
Clorox -2% Humana -3% Public Storage -2% Weyerhaeuser -30%
Coach 3% International Paper 9% Rent-A-Center 4% Whirlpool -14%
Colgate-Palmolive 0% J & J Snack Foods 3% Revlon pushed Wynn Resorts -49%
Columbia Sportswear 6% Kraft Foods Group 6% Sally Beauty pushed Xcel Energy -8%

 

There was not much to note last week in terms of individual earnings with the majority of companies announcing earnings that were very close to expectations. If, however, a company did not release something close to expectations the company was more likely to have fallen short of expectations than to have beaten expectations, as noted by the large number of red highlights above when compared to green. The biggest miss of the week was LinkedIn as the company completely fell short of expectations. To make matters worse, LinkedIn had its earnings results leaked a few hours before they were supposed to be released, resulting in the stock being halted by the stock exchange.

 

According to Factset Research, we have now seen 360 (72 percent) of the S&P 500 companies release their results for the first quarter of 2015. Of the 360 that have released, 71 percent have met or beaten earnings estimates, while 29 percent have fallen short of expectations. So far this earnings season we have been seeing a steady slide on the percentage of companies that have beaten earnings estimates with the figure initially being 77 percent and now being at 71 percent. When looking at revenue, of the companies that have reported, 46 percent of the companies have beaten estimates while 54 percent have fallen short. The percentage of companies beating revenue expectations is far more important than the earnings beat percentage as revenues are the top line of a company’s income statement and not subject to as much financial wizardry as the other reported numbers. As we near the three quarter mark for earnings season for the first quarter of 2015, the quarter has been below expectations in many ways, but not by as much as it could have been given all of the headwinds that corporate America had to deal with during the quarter.

 

This week is the busiest week of earnings season with more than 1,800 companies set to report their earnings for the first quarter of 2015. However, many of the companies releasing earnings are companies that many people have never heard of. This is because they are either very small or foreign with a US listed stock. Below is a table of the better known companies that will release their earnings this week, with the releases that have the most potential to impact the markets highlighted in green:

 

3D Systems Estee Lauder Noble Energy
Allstate Groupon Noodles & Co
AOL Hain Celestial Group Office Depot
Aqua America Hyatt Hotels Papa John’s
Archer Daniels Midland Jack Henry & Associates South Jersey Industries
Avis Budget Group Kate Spade Sprint
Babcock & Wilcox Kellogg Sprouts Farmers Market
Bloomin’ Brands Keurig Green Mountain Sturm Ruger
Church & Dwight Loews Tesla Motors
Comcast Marathon Oil Tyson Foods
Crocs Metlife Walt Disney
DIRECTV MGM Resorts WebMD Health
Electronic Arts Molson Coors Brewing Wendys
Energizer News Corp Whole Foods Market

 

Whole Foods will be in the spotlight this week as the results from the first quarter of its efforts to get away from the stigma of being “whole paycheck” is now in the books and the results may show a bit of a downturn in business. Walt Disney will likely see a strong quarter as it continues to ride on the coat tails of its blockbuster Frozen. Hyatt Hotels will be watched to see if it is seeing any decline in foot traffic after the poor reading on consumer confidence that came out last week. Tesla Motors will also be closely watched as it is currently the darling of the technology sector as it continues to reach into the automotive space and is now branching into the battery market, both commercial and residential.

 

International News: There were not many new developments in the international news last week as the economic situations around the world seemed to continue moving forward. One situation that did change a little last week concerned oil and Iran. Iran captured a cargo ship that was sailing in the Strait of Hormuz on Tuesday in what it is saying is a “commercial issue,” not a political or security statement. The ship was being operated by Maersk, a Danish company, and was flagged out of the Marshall Islands. Needless to say, the US and the rest of the world certainly do not believe that the capturing of the ship was for anything other than to demonstrate how effectively Iran can control the vital shipping lane if it would like to. In response to the incident the US announced that it is sending an aircraft carrier and a guided missile destroyer to the area to “observe” the handling of the situation by the Iranians. The US has also announced that it will offer the navy to provide safe passage of ships moving through the shipping lane to ensure that there are not more unfortunate “commercial issues” with Iran. This news made the oil market very uneasy as a large percentage of oil from the Middle East regions travels through the narrow and relatively shallow waters of the strait. If the situation dissipates oil prices will likely fall as the “war in the Middle East premium” would likely be removed from the price per barrel. The other situation everyone is watching involves Greece.

 

Greece continues to make headlines as it pushes closer and closer to major payment deadlines, with the next payment being a large one to the IMF, which is due on Wednesday this week. The country has already asked every quasi government entity to turn extra cash into the central bank and it has received some cash and has made payments to government workers and pensioners. With a payment due to the IMF to the tune of 400 million Euros, there are a lot of questions as to whether Greece has the funds. Odds are that Greece will find the cash at the very last minute, which would be Tuesday. If Greece fails to make the payment it does not mean things will spiral out of control quickly. The IMF would send a demand of payment notice. If no payment has been received two weeks later, the IMF will send a demand of full payment of the loan (Greece will certainly not have the funds for this). At this point Greece would technically be labeled as in default. This labeling does not happen quickly, but after it does other creditors start to pull clauses from their contracts and the pay in full demand notices sent to Greece really start to add up quickly. One of the unknown questions is whether the European Central Bank (ECB) will stand by the Greek banks and continue to fund them with Euros or if the ECB will pull the plug on lending to the banks. If the ECB keeps lending, the situation for the average person in Greece while the country is in default will likely not change much. If the ECB stops lending, there would likely be a run on the banks as depositors try to pull as many Euros from their accounts as they can. This would in turn cause the banks to fail and the Greek government would have to freeze all bank accounts. This is certainly not the route voters thought it would come to when they elected the current government just a few short months ago. The international financial markets would largely remain unaffected, as Greece is such a small economy without many large ties to anything. The Euro might benefit as it may increase in value if Greece for one reason or another is forced onto another currency, as the weakest link in the Euro system would be broken.

 

Market Statistics: In keeping with the trend of moving up one week only to move lower the following week, last week was no exception as the three major US indexes moved lower after a strong showing two weeks ago.

 

Index Change Volume
Dow -0.31% Above Average
S&P 500 -0.44% Above Average
NASDAQ -1.70% Above Average

 

The NASDAQ was by far the weakest of the major indexes, as was expected since the index had recently been pushed far too high for the given economic environment so that it could finally make a new all time high over the technology bubble level seen 15 years ago. After making the said high some of the steam let out of the index as it moved noticeably lower at a much faster pace than the other two indexes last week. The NASDAQ now looks to be in equilibrium when compared to the other two indexes, so we will likely not see such outsized performance going forward in the short term.

 

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 2.04% Biotechnology -5.42%
Basic Materials 1.64% Pharmaceuticals -4.75%
Natural Resources 1.53% Healthcare Providers -4.40%
Energy 1.30% Medical Devices -3.52%
Oil & Gas Exploration 1.26% Real Estate -2.88%

Three of the top five sectors this week were in the bottom five sectors last week, in a true indication of just how much rotation and change we are seeing at all levels of the markets. Some of the movements we are seeing have to do with earnings announcements as a few bellwether companies in relatively small sectors of the market can really move the sector as a whole. Semiconductors are a prime example of this as last week a few key semiconductor companies really set the sector as a whole moving higher. On the downside last week, several of the top performing sectors of the markets over the past few months had tough weeks, most noticeably healthcare, biotechnology and pharmaceuticals. All three sectors moved lower last week after being some of the main driving forces behind the NASDAQ moving up as much as it did over the past two months.

Fixed income trading around the world once again made a noticeable impact on the US fixed income market:

Fixed Income Change
Long (20+ years) -3.93%
Middle (7-10 years) -1.70%
Short (less than 1 year) 0.00%
TIPS -0.98%

With the poor reading on GDP, the speculation about when the Fed will start to increase interest rates was as rampant as ever, but for the most part the time for this increase is seemingly being kicked further and further out. The trend last week was for bond prices to move lower as yields increased here in the US, a result of the strong demand for US fixed income ahead of uncertainty surrounding Greece’s ability to make a large IMF payment. The best performing currency globally last week was the Euro, which increased by 2.98 percent as investors changed course and moved back in to the Euro after moving heavily out two weeks ago. The weakest performing currency last week was the Japanese Yen, which turned in the worse performance of any of the major currencies last week, giving up 1.12 percent against the US dollar. The currency markets have recently been very active as large international investors try to hedge some of their positions while taking advantage of others, all while trying to guess what central banks around the world will do with their policies.

Commodities overall were mixed last week as oil made it three weeks in a row of advances:

Metals Change Commodities Change
Gold 0.33% Oil 3.50%
Silver 2.72% Livestock 0.55%
Copper 7.33% Grains -1.59%
Agriculture -1.48%

The overall Goldman Sachs Commodity Index turned in a gain of 2.22 percent last week as oil rallied for the third week in a row, gaining 3.50 percent. Oil is now up close to 14.5 percent over the course of the past three weeks with much of the move being due to uncertainty surrounding the situation in several Middle Eastern countries; the latest situation involving Iran, as mentioned above in the International section of this commentary. Metals were all positive last week with Copper seeing the largest single week gain that we have seen since December of 2011 as the industrial metal gained 7.33 percent. Soft commodities were mixed last week as Grains moved lower for the second week in a row along with Agriculture, while Livestock bucked the trend and moved upward by 0.55 percent.

On the international front, the only region of the world that saw positive performance was China. The best performing index last week was the Shanghai based Se Composite Index, which gained 1.09 percent. The lowest performing index last week was found in Sweden and was the Stockholm based OMX Stockholm 30 Index, which gave up 4.15 percent.

While the VIX only moved a little last week relative to how much it had been moving over the past few months, it continued the pattern of moving lower one week only to come back and move higher the next. Last week it was the VIX’s turn to move higher and it did so by gaining 3.34 percent. This choppy volatility on the VIX is directly correlated to the choppy trading we have been seeing in the financial markets in general and it does not look like it will end any time soon. The VIX would have been about 13 percent higher had it not been for the drastic decline on the VIX as the market advanced on Friday. The VIX is currently near the lower end of its recent range, but if the trend continues it should move higher this week. At the current level of 12.70 the VIX is implying a move of 3.67 percent over the course of the next 30 days. As always, the direction of the move is unknown.

For the trading week ending on 5/1/2015, returns in FSI’s hypothetical models* (net of a 1% annual management fee) were as follows:

Last Week Year to Date
Aggressive Model -1.00 % 1.03 %
Aggressive Benchmark -0.69 % 4.55 %
Growth Model -0.92 % 0.38 %
Growth Benchmark -0.54  % 3.58 %
Moderate Model -0.64 % 0.12 %
Moderate Benchmark -0.38 % 2.59 %
Income Model -0.54 % 0.32 %
Income Benchmark -0.19 % 1.34 %

*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.

 

Over the course of the previous week we made a few changes to our models. Our first change was to close out our positions in the US dollar, as the weakness we have been seeing recently looks like it could persist, as speculation about the US Fed moves around the currency markets. Our second change last week was to add to a few equity positions as they turned around late in the week. The positions we added to were healthcare and electronics. We currently still maintain a high amount of cash in our lower risk models, while being nearly fully invested in our higher risk models. Oil and Energy continue to be the sectors of the market we are watching closely for a potential first step into an investment.

 

Economic News:  Last week was a busy week for economic news releases with the focus of the week being on the US consumer. There were two releases that missed market expectations by a significant amount (highlighted in red below) and no releases that significantly beat market expectations to the upside:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Neutral 4/28/2015 Case-Shiller 20-City Index February 2015 5.00% 4.70%
Negative 4/28/2015 Consumer Confidence April 2015 95.2 102.2
Negative 4/29/2015 GDP-Adv. Q1 2015 0.20% 1.10%
Neutral 4/29/2015 Pending Home Sales March 2015 1.10% 1.60%
Neutral 4/29/2015 FOMC Rate Decision April 2015 0.25% 0.25%
Neutral 4/30/2015 Initial Claims Previous Week 262K 290K
Neutral 4/30/2015 Continuing Claims Previous Week 2253K 2318K
Slightly Negative 4/30/2015 Personal Income March 2015 0.00% 0.20%
Neutral 4/30/2015 Personal Spending March 2015 0.40% 0.50%
Neutral 4/30/2015 PCE Prices – Core March 2015 0.10% 0.20%
Slightly Positive 4/30/2015 Chicago PMI April 2015 52.3 50
Neutral 5/1/2015 ISM Index April 2015 51.5 52
Neutral 5/1/2015 University of Michigan Consumer Sentiment Index April 2015 95.9 96

Data for table from Econoday.com, Bloomberg and Yahoo Finance

 

Last week started on Tuesday with the release of the Case-Shiller 20-City Home Price index for the month of February, which came in at 5 percent, slightly ahead of the expected 4.7 percent. This release, however, was overshadowed by a poor print on consumer confidence, which was expected to come in at 102.2, but instead only registered a 95.2 reading. This is on par with what we had been seeing out of the spending figures and some of the other economic data points released earlier during the month, but it was still far below even the lowest estimates. On Wednesday, just before the conclusion of the Fed meeting, the advanced estimate of the first quarter GDP figure for the US was released and came in at a 0.2 percent reading (a far cry from the expected 1.1 percent). As mentioned above, this print could cause a bit of a problem for the Fed going forward when it tries to increase interest rates. Also released on Wednesday, but largely ignored, was the pending home sales figure for the month of March, which came in slightly lower than expected at 1.1 percent rather than the anticipated 1.6 percent. On Thursday the standard weekly employment related figures were released and both came in better than expected, but not by enough for the markets to really take notice. Personal income and spending were also released with both disappointing with income flat and spending increasing by less than expected. Prices as measured by the PCE Core Price Index showed little movement during March, adding further to the pickle that the Fed finds itself currently in with its dual mandate. The one release of the week that was slightly positive was released on Thursday, with the Chicago PMI coming in slightly better than expected. Wrapping up the week on Friday were the ISM Index and the University of Michigan’s Consumer Sentiment Index figures, both for the month of April and both coming in slightly below expectations, but not by enough to cause alarm in the financial markets.

 

This week is a relatively slow week for economic news releases, with the focus of the releases being on the employment market in the US. The releases highlighted below have the potential to move the overall markets on the day they are released:

 

Date Release Release Range Market Expectation
5/4/2015 Factory Orders March 2015 2.10%
5/5/2015 ISM Services April 2015 56.40
5/6/2015 ADP Employment Change April 2015 189K
5/7/2015 Initial Claims Previous Week 280K
5/7/2015 Continuing Claims Previous Week 2300K
5/7/2015 Consumer Credit March 2015 $16.0B
5/8/2015 Nonfarm Payrolls April 2015 213K
5/8/2015 Nonfarm Private Payrolls April 2015 205K
5/8/2015 Unemployment Rate April 2015 5.40%

Data for table from Econoday.com, Bloomberg and Yahoo Finance

 

This week starts off on Monday with the release of the Factory Orders data for the month of March, which will likely miss expectations as the GDP print last week was so poor you would think there would be some carry over. On Tuesday the Services side of the ISM Index is set to be released with expectations of a slight uptick above expectations in line with what we saw from the overall ISM Index late last week. On Wednesday the start of the employment data is set to be released with the ADP Employment Change index for the month of April, which is expected to show an increase in total jobs in the US of about 189,000. On Thursday the standard weekly unemployment related figures are set to be released with both figures expected to be slightly higher than they were last week. On Friday the big releases of the week are set to be released with the nonfarm public and private payrolls figures as well as the overall unemployment rate in the US, as measured by the US government. Both of the payroll figures are expected to show a reading just over 200,000, while the overall unemployment rate is expected to decline from 5.5 percent in March down to 5.4 percent in April. If this comes to fruition it will be just one more thing that could cause an issue for the Fed as the full employment part of its dual mandate seems to be well ahead of its price target set for the price stability mandate.

 

Fun fact of the week—Iranian Flag

 

The current Iranian flag was adopted in 1980 and has three equal horizontal bands of green, white, and red. Green is the color of Islam and represents growth, white symbolizes honesty and peace, and red stands for bravery and martyrdom. Centered in the middle white band is the stylized representation of the word “Allah” and the phrase La ilaha illa Allah (“None is worthy of worship but Allah”) in the shape of a tulip. Along the inner edges of the green and red bands are 22 copies of the phrase Allahu Akbar (“God is great”).

Iran Flag

For a PDF version of the below commentary please click here Weekly Letter 4-27-2015

Commentary at a glance:

-The NASDAQ has finally made it (15 plus years) to a new all time high!

-Earnings season in the US continues to move ahead with earnings coming in lower.

-Greece: Out with the old and in with the new; will it be enough to get bailout money?

-Economic news last week sent mixed signals.

 

Market Wrap-Up: All three of the major US indexes moved higher last week on several key earnings announcements. The positive movement was enough for the NASDAQ to finally make a new all time high over the previous all time high hit back in March of 2000, some 15 years ago. Despite the NASDAQ moving much higher and attaining a new all time high the other two major US indexes remain range bound. The charts below are of the three major US indexes in green with their respective wide trading ranges drawn by the red lines. The VIX (lower right pane below) is drawn with the index in green and the one year average level of the VIX drawn in red:

4 charts 4-27-15

As you can clearly see above, the NASDAQ (lower left pane above) is now the strongest of the three major indexes, having broken out of its trading range last week and making a new all time high, as mentioned above. The second strongest index currently is the S&P 500 (upper left pane above), which is near the upper end of its most recent trading range. The next few days will be a good test for the index because it will either bounce off of the resistance level and move lower or the index could punch through the resistance level and move higher. The Dow (upper right pane above), on the other hand, seems perfectly content staying in the middle of its trading range as the index wades through earnings season. The VIX (lower right pane above) continued to push lower over the course of the previous week, ending the week at the lowest point we have seen so far during 2015 and the lowest point since November of 2014. At the current levels and with the markets climbing the proverbial wall of worry it would not be surprising to see the VIX push even lower. The main catalyst that could push it higher would be the situation in Greece getting further out of hand or misjudgments by the negotiating parties causing Greece to default on its debts. While this is a real possibility with the changes that have been recently made in Greece it appears the Greek government really will negotiate and come to the terms the lenders have outlined.

 

The other catalyst that could push the markets higher or lower at this point is earnings season.  We have made it through a few weeks of earnings announcements without any major missteps, but we still have a long way to go. This week, as mentioned below, there are a few of the major integrated oil companies set to release their earnings. Granted, they have all guided expectations much lower over the past few months, but that does not necessarily mean they will beat expectations. If the first one or two of the major oil companies misses their already lowered expectations we could see the financial markets move noticeably lower, but this may also have the opposite effect as worse than expected earnings from the major oil companies may put the Fed on hold for increasing interest rates, something the market would likely cheer as the punch bowl of cheap money would continue to flow. We are starting to approach the time of year when lots of investors start to recite a very old saying of “Sell in May and go away; come back after Labor Day.” This saying is not exactly accurate as the original saying is “Sell in May and go away; come back after St Leger Day.”

 

St Leger Day is the final horse race in the UK horse racing season that takes place during the first half of September every year. The reasoning behind the saying is that large money managers and bankers liked to take time off during the summers and do things other than look at the financial markets. In looking back at the historical data on the S&P 500 I found that the theory worked well in the 1960s and 1970s as the average return between the end of April and the end of September was indeed negative with the average being a decline of 2.15 percent. However, since the advent of computers and electronic markets the benefit of being out of the markets during the same months since 1980 has been reversed with gains being seen during this time, averaging 1.33 percent between April and September. Looking at the entire time period it is a wash with an expected gain of 0.15 percent from April through September of any given year. The period between the end of April and the end of September, however, does underperform by a lot when compared to investment returns on the S&P 500 between the end of September and the end of April. The average return between the end of September and the end of April is a little more than 8 percent per year since the 1960s. Much of this gain is due to the holiday shopping season, a time when the US consumer does the majority of its discretionary spending for the year and corporate America benefits from the spending.

 

National News: National news last week was all about earnings season as the investment media seemed to ignore anything new on the Fed raising interest rates and even the upcoming Presidential elections to be held next year. Last week was the second week of earnings season for the first quarter of 2015 and financial companies were in the spotlight. Below is a table of the better known companies that released earnings last week with earnings that missed expectations highlighted in red, while earnings that beat expectations by more than 10 percent are highlighted in green:

 

3M -4% Chubb 2% Hershey -5% PulteGroup -25%
Abbott Laboratories 12% Coca-Cola 12% IBM 2% Raytheon 24%
Alaska Air 1% D.R. Horton 3% Juniper Networks 0% RLI -2%
Altera -3% Domino’s Pizza 1% Kansas City Southern -6% Sigma-Aldrich pushed
Altria 2% Dow Chemical 8% Kimberly-Clark 7% Simon Property 2%
Amazon 8% Dr Pepper Snapple 7% Knight Transportation 16% Six Flags -9%
Amgen 20% Dunkin’ Brands 11% Manpower 5% Snap-On 2%
Arthur J. Gallagher 8% E*TRADE 38% McDonald’s 5% Southwest Airlines 3%
AT&T 0% eBay 16% Meredith 4% Southwestern Energy 0%
Autoliv 11% Eli Lilly 14% Microsoft 22% Starbucks 0%
Baker Hughes -51% Ethan Allen Interiors 0% Morgan Stanley 8% Stryker 2%
Bank of New York 14% Facebook -4% NetSuite 30% Texas Instruments -2%
Barnes 2% Freeport-McMoRan -50% Newmont Mining 109% Tupperware Brands 4%
BJ’s Restaurants 29% General Motors -11% Nucor 50% Under Armour 0%
Boeing 9% Genuine Parts 0% O’Reilly Automotive 7% United Technologies 5%
Cabela’s 3% Halliburton 20% Pepsi 5% Xerox 0%
Callaway Golf 39% Hanes 0% Piper Jaffray 11% Yahoo! 0%
Caterpillar 38% Harley-Davidson 2% Procter & Gamble 0% Yum! Brands 11%

 

According to Factset Research we have now seen 201 (40 percent) of the S&P 500 companies release their results for the first quarter of 2015. Of the 201 that have released, 73 percent have met or beaten earnings estimates, while 27 percent have fallen short of expectations. With last week seeing the percentage of companies beating earnings fall from 77 percent down to 73 percent, we have now moved under the 75 percent that was the final figure for the fourth quarter of 2014 and the big oil companies have not released their earning yet. When looking at the revenues of the companies that have reported, 47 percent of the companies have beaten estimates. For comparison, fourth quarter 2014 saw 58 percent of companies beat revenues expectations. After this current week we should have a much better picture of where the numbers could be at the end of the quarter as numerous S&P 500 component companies are releasing their earnings.

 

This week is the busiest week of earnings season with more than 1,500 companies set to report their earnings for the first quarter of 2015. Below is a table of the better known companies that will release their earnings this week, with the releases that have the most potential to impact the markets highlighted in green:

 

Aetna ConocoPhillips Lexmark International Starwood Hotels
Aflac Cooper Tire & Rubber LinkedIn Time Warner Cable
American Tower Crocs Marathon Petroleum T-Mobile
Anthem CVS Health Marriott International Tuesday Morning
Apple Eastman Chemical Martin Marietta Materials Twitter
Aptargroup Equity Residential MasterCard United Parcel Service
Arrow Electronics Exxon Mobil Mylan United States Steel
Ball Ford Motor New York Times Valero Energy
Big 5 Sporting Goods General Dynamics Northrop Grumman VF
BorgWarner Gilead Sciences Owens & Minor Visa
Buffalo Wild Wings Goodyear Tire & Rubber Panera Bread Waste Connections
Cardinal Health GoPro Pfizer Waste Management
Chevron Helen of Troy Phillips 66 Western Digital
Clorox Humana Public Storage Weyerhaeuser
Coach International Paper Rent-A-Center Whirlpool
Colgate-Palmolive J & J Snack Foods Revlon Wynn Resorts
Columbia Sportswear Kraft Foods Group Sally Beauty Xcel Energy

 

Apple will be the most followed earnings announcement this week, as it is almost any week it announces earnings. Apple moves the markets and any insight into the cell phone business or new ventures such as Apple watch have large knock on effects on other technology companies. Another area of the markets that will be very closely watched this week is big oil companies as Exxon, Chevron, Conoco Phillips and Phillips 66 all release earnings. For these companies the earnings time period for which they are reporting is a time when oil was at the lowest points we have seen since the recession of 2008. The bar is very low for these companies, but I am still looking for at least one to not perform up to expectations. MasterCard and Visa are the other two major announcements the markets will be watching very closely as they represent the majority of credit card transactions in the US and have a lot of data about the habits of US consumers. This week really will be a week that will make or break earnings season as we will easily push over the half way point on all of the major indexes in terms of the number of companies that have released earnings.

 

International News: International news focused on Greece last week as the country continues to struggle to come up with the cash needed for day to day operations. In the latest development, Greece changed out its players on the debt negotiations team, removing Finance Minister Yanis Varoufakis, as he seemed to be personally getting in the way of the negotiations. After a meeting last week, EU officials called him out for being lazy and dragging his feet. Mr Varoufakis still remains the Finance Minister for Greece so any final deal with the creditors and Greece would have to be approved by him, but it seems he will go along with any deal that is struck between the creditors and the new negotiations team. Following the news of the change in Greece the yields on Greek debt fell in a sign that the markets believe the chances for a deal are better with a new team. A new deal between Greece and its creditors is needed very quickly as the country is burning through its stock pile of cash faster than it seems to be able to build it. Greece has a few very large month end payments due later this week, mainly to public workers and pensioners. Next week Greece has an 800 million euro loan payment due to the IMF. If Greece fails to make this loan payment, it would be the start of defaults by Greece. On top of the loan repayments next week the country also has to pay treasury debt holders to the tune of 1.4 billion Euros both next week and the week following. A default by Greece does not necessarily mean it will be kicked out of the Eurozone and off of the common currency, but it would spell a very difficult time ahead for Greece as the country attempts to negotiate from an even weaker position.

 

Market Statistics: The markets continued their trend of moving down one week only to move higher the next as the three major US indexes moved higher after a poor showing two weeks ago.

 

Index Change Volume
NASDAQ 3.25% Average
Dow 1.75% Average
S&P 500 1.42% Above Average

 

The large swings in the financial markets last week were almost entirely driven by earnings announcements as a number of companies have turned in earnings that were better than anticipated, even though the anticipated level was set extremely low due to fears about the strength of the US dollar and the drop in oil prices.

 

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
Software 4.47% Home Construction -2.10%
Technology 4.12% Semiconductors -1.45%
Telecommunications 3.55% Oil & Gas Exploration -0.19%
Consumer Service 3.15% Regional Banks -0.03%
Materials 2.92% Energy 0.02%

Technology related sectors turned in the top performance last week as strong earnings drove results and the NASDAQ pushed to a new all time high on Thursday, closing at 5,056.06, well ahead of the previous all time high from March 10th, 2000, of 5,048.62. The trading last week around the NASDAQ was a “rising tide lifts all boats” scenario, where anything related to technology seemed to be pushed higher. On the flip side, Home Construction had a tough week last week as the sector gave up more than 2 percent, thanks in large part to slowing construction spending. The one sector of the technology markets that bucked the trend last week and moved lower was the semiconductor sector as investors seemed to be more than willing to pull profits as the NASDAQ hit its all time high. There were also a few key earnings misses that helped push the sector lower during the course of the week.

After fears of a Greek default two weeks ago scared investors into the US dollar, and US fixed income investments moved right back out last week as a default failed to materialize in Greece and negotiations continued:

Fixed Income Change
Long (20+ years) -1.81%
Middle (7-10 years) -0.32%
Short (less than 1 year) -0.01%
TIPS -0.41%

The fixed income market in the US continues to try to balance out the potential for the Fed increasing interest rates in either June or September with other fixed income investments around the world. Most of the developed markets are seeing interest rates much lower than the rates being seen in the US so we are technically still the safe haven for fixed income from around the world, but even the rates in the US are historically very low. Despite the relatively high rates on US fixed income and the uncertainty over Europe the US dollar slid by 0.43 percent last week against a basket of international currencies. The best performing currency globally last week was the British Pound, which increased by 1.63 percent as investors continued to leave the Euro, but decided to stay within the geographic region of Europe. After being the strongest of the global currencies last week the Swiss Franc moved into the dog house, turning in the worst performance of any of the major currencies last week, giving up 0.16 percent against the US dollar.

Commodities overall were mixed last week as oil made it two weeks in a row of advances:

Metals Change Commodities Change
Gold -2.21% Oil 1.93%
Silver -3.21% Livestock 2.66%
Copper -1.62% Grains -2.07%
Agriculture 0.45%

The overall Goldman Sachs Commodity Index turned in a gain of 0.67 percent last week as oil rallied for the second week in a row, gaining 1.93 percent. Metals were negative last week with Silver giving up 3.21 percent, while Gold was down 2.21 percent and Copper declined 1.62 percent. Weak demand seemed to be the driving force behind the lower metals last week as numerous reports seemed to point to lower overall demand of the metals. Soft commodities were mixed last week as grains moved lower while agriculture overall increased slightly with Livestock seeing one of the largest increases of the week, gaining 2.66 percent.

On the international front last week the best performance globally was found in Latin America. The best performing index last week was the Sao Paulo based Se BOVESPA Index, which gained 4.89 percent, as protests over President Rousseff’s government seem to be dissipating. The lowest performing index last week (the only negative performing index) was found in India and was the Bombay based Se SENSEX Index, which gave up 3.53 percent.

The VIX has been in a yo-yo mode for the past few weeks and given that it was up by more than 10 percent two weeks ago last week it was time for a reversal. The VIX did not let us down, giving up 11.52 percent over the course of last week. This choppy volatility we have been seeing on the VIX is directly correlated to the choppy trading we have been seeing on the financial markets in general and it does not look like it will end any time soon. The VIX is currently at the lowest point we have seen so far this year as well as the lowest point we have seen since November of 2014. At the current level of 12.29 the VIX is implying a move of 3.55 percent over the course of the next 30 days. As always the direction of the move is unknown.

For the trading week ending on 4/24/2015, returns in FSI’s hypothetical models* (net of a 1% annual management fee) were as follows:

Last Week Year to Date
Aggressive Model 0.88 % 2.07 %
Aggressive Benchmark 1.57 % 5.28 %
Growth Model 0.73 % 1.31 %
Growth Benchmark 1.22  % 4.14 %
Moderate Model 0.61 % 0.87 %
Moderate Benchmark 0.87 % 2.97 %
Income Model 0.59 % 0.77 %
Income Benchmark 0.44 % 1.53 %

*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 a few changes to our models over the course of the past week, as we adjusted out exposure to several sectors of the markets. The first thing we did last week was to add a new position in electronics through the Rydex Electronics Fund (RYSIX). We did this for several reasons, the first being that electronics and technology in general is an area of the markets we owned no exposure in and yet it is an area that has been reporting good earnings and has been growing in relative strength over the past few weeks. We used cash in most cases to fund the purchase of the electronics holding; if cash was not available we sold part of our holding in the strengthening dollar to free up enough money to make the purchase. The second change we made last week was to increase our exposure to healthcare as this sector continues to show strength as the market has been chopping around. We did this by selling part of our Rydex Healthcare fund (RYHIX) and swapping the proceeds into Profunds Ultra Healthcare (HCPIX). This fund employs a little leverage and increased our overall exposure to the sector while not tying up any more funds. In our lower risk models we also added to our position in Forward Select income fund (KIFAX) as this fund continues to perform well in the current market environment and is still maintaining a very strong dividend payout. Areas of the market we are still watching for potential investment in the near future include energy and oil and gas exploration as these two sectors of the market have moved substantially lower over the past 9 months and are showing up as potentially valuable to buy at these depressed levels.

 

Economic News:  Last week was a very slow week for economic news releases with the focus of the week being on the US consumer. There was a single release that missed market expectations by a significant amount (highlighted in red below) and one release that significantly beat market expectations to the upside (highlighted in green below). Surprisingly, they were looking at the same data:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Neutral 4/22/2015 Existing Home Sales March 2015 5.19M 5.05M
Slightly Negative 4/23/2015 Initial Claims Previous Week 295K 288K
Neutral 4/23/2015 Continuing Claims Previous Week 2325K 2330K
Neutral 4/23/2015 New Home Sales March 2015 481K 520K
Positive 4/24/2015 Durable Orders March 2015 4.00% 0.50%
Negative 4/24/2015 Durable Goods -ex transportation March 2015 -0.20% 0.40%

Data for table from Econoday.com, Bloomberg and Yahoo Finance

 

Last week started out on Wednesday with the release of existing home sales for the month of March, which came in almost exactly at market expectations leading to a non-market reaction. On Thursday, in addition to the standard weekly unemployment related figures, new home sales for March came in below expectations, but not by enough for the market to take notice, leaving the housing related releases of the week at odds with each other. The unemployment numbers also sent mixed signals as initial jobless claims came in slightly higher than anticipated, while continuing jobless claims came in slightly lower than anticipated, thus having an offsetting effect on each other. On Friday more opposing figures were released with the durable goods orders figures. Overall durable goods orders increased by 4 percent, much better than the 0.5 percent that was expected by the markets, but the reason for the increase was entirely due to the transportation industry. When transportation was excluded from the calculation, durable goods orders for the month of March declined by -0.2 percent, much worse than the anticipated increase of 0.4 percent. This means that without cars, trucks and planes, which are mostly purchased by corporate America, durable goods sales would have declined during the month. Since all of the transportation items that are included are very long life items, it means they will probably not be purchased again for a significant period of time. This could in turn lead to lower figures in the coming months as the US economy seems to be slowing down slightly.

 

This week is a full week for economic news releases. The releases highlighted below have the potential to move the overall markets on the day they are released:

 

Date Release Release Range Market Expectation
4/28/2015 Case-Shiller 20-city Index February 2015 4.70%
4/28/2015 Consumer Confidence April 2015 102.2
4/29/2015 GDP-Adv. Q1 2015 1.10%
4/29/2015 Pending Home Sales March 2015 1.60%
4/29/2015 FOMC Rate Decision April 2015 0.25%
4/30/2015 Initial Claims Previous Week 290K
4/30/2015 Continuing Claims Previous Week 2318K
4/30/2015 Personal Income March 2015 0.20%
4/30/2015 Personal Spending March 2015 0.50%
4/30/2015 PCE Prices – Core March 2015 0.20%
4/30/2015 Chicago PMI April 2015 50
5/1/2015 ISM Index April 2015 52
5/1/2015 University of Michigan Consumer Sentiment Index April 2015 96

Data for table from Econoday.com, Bloomberg and Yahoo Finance

 

This week kicks off on Tuesday with the release of the Case-Shiller 20 City Home Price Index for the month of February. Expectations are for home prices on average to have increased by 4.7 percent. This seems reasonable given the data we have already received about the housing market for the same time period. Also released on Tuesday is the consumer confidence figure for the month of April, which is expected to show an increase of a little less than 1 point up to 102.2. While increasing confidence is nice, increasing confidence without increasing spending does the economy almost no good at all. On Wednesday the advanced first quarter 2015 GDP figure is set to be released by the US government. Expectations are for a drastic decline from the fourth quarter reading of 2.2 percent down to 1.1 percent growth. Later during the day on Wednesday the Federal Reserve is set to release their latest rate decision, which is expected to show no change from the zero to one quarter of a percent, the level it has been for many years at this point. Thursday is a busy day with the standard weekly unemployment related figures being released as well as personal income and spending for the month of March. Little change is expected on any of the figures as personal income and spending are both expected to have increased one half a percent or less, while unemployment claims are expected to have moved by less than 5,000 each. Later during the day on Thursday the Chicago PMI for the month of April is set to be released with expectations of a reading of 50.0, which is better than the 46.3 we saw back in March, but still far too close to the contraction zone for many investors. Manufacturing in the US has been contracting in nearly every region for the majority of 2015 so far and it does not look like there will be a change in this trend any time soon. On Friday morning the ISM index for the month of April is set to be released with expectations of a slight increase from 51.2 back in March up to 52 in April. This figure is close enough to the previous month’s reading that it would take a lot for the markets to react to this release no matter what is released. This week wraps up on Friday with the release of the University of Michigan’s Consumer Sentiment Index for the month of May (first estimate) in which confidence is expected to be exactly the same as it was the prior week when it was measured.

 

Fun fact of the week—Greek debt repayment schedules.

 

The following charts are from the Wall Street Journal webpage and illustrate the amount of debt payments due by Greece for the rest of 2015 (first chart) and for all years out to 2054 (second chart). Both scales are in billions of Euros:

Greece debts 2015Greece debts all years

With such large numbers so many years out, and the only hope of repaying current debts being to issue further dated debt, it seems like a fool’s errand to continue trying to negotiate a deal, unless it is a deal that wipes out all of their outstanding debts, which the Europeans and other creditors will never go for.

 

Source: Wall Street Journal; http://graphics.wsj.com/greece-debt-timeline/

For a PDF version of the below commentary please click here Weekly Letter 4-20-2015

Commentary at a glance:

-Major US indexes pushed lower last week due to a sharp decline seen on Friday.

-China is making changes to combat the overheated nature of its financial markets.

-Oil saw the largest weekly increase in more than four years.

-Greece is once again making negative headlines—will this be the one?

-The first Fed interest rate move is still expected to occur in September of this year.

 

Market Wrap-Up: All three of the major US indexes remain range bound, giving up all of their weekly gain on Friday after making it near the upper bound of their trading ranges. While the indexes were lower the VIX moved off of the lowest point seen in 2015 so far and closed the week more than 10 percent higher than it started. The charts below are of the three major US indexes in green with their respective wide trading ranges drawn by the red lines. The VIX (lower right pane below) is drawn with the index in green and the one year average level of the VIX drawn in red:

4 charts 4-20-15

Just as it looked like a breakout may be forming, the markets reminded investors that what it gives with one hand it can take away with the other. Going into Friday last week the NASDAQ (lower left chart above) looked like it was going to break above and stay above the upper bound of its trading range, but this was not to be the case as the index fell the most in a single day since March 25th. The NASDAQ had once again gotten to within a very small distance from the all time high, which has so far stood since the technology bubble of 2000. The S&P 500 (upper left chart above) was also moving along higher for the week until Friday came along, falling short of a minor resistance level and well short of the upper bound of its most recent trading range. We saw roughly the same action on the Dow (upper right pane above) as we saw on the S&P 500 in terms of hitting a specific point and then reversing course and moving lower. There were several reasons given for the decline seen on Friday with China bearing the brunt of the accusations, as mentioned below in the international news section. A second reason for the decline was that Greece may actually be on the edge of defaulting on its debts. This story has played out numerous times in the past few months, so I don’t know why it should be given any more credibility this time around than any of the others. Another potential reason for the decline is that the markets need to let off a little steam going into earnings season. Earnings season for the first quarter of 2015 is supposed to be pretty bad when compared to the fourth quarter of 2014, so investors carrying healthy gains into this time of year may have just taken the relatively high levels seen early last week and booked profits. Another reason I will mention is one that rose in popularity last week and it is that the market just wanted to move the way that it did; no other reason needed!

 

Oil could have also played a part in the movement of the markets last week as oil jumped by the most in a week that it has moved since the week of February 25th, 2011. With oil moving more than 8 percent higher it was not surprising to see the value of the US dollar moved lower, as the international standard for the price of a barrel of oil is in US dollars. Have we seen the bottom in oil, to be followed by prices continually moving up? It seems highly unlikely; much of the move last week was caused by a report out of the US government that showed oil stock piles increasing by less than was expected. This was seen as the “catalyst” for oil prices moving higher. There was not an escalation in fighting in oil producing countries, nor was there some large increase in demand or a shortage of supply. The longer run forecasts I have seen recently are still calling for oil to stay around $55 per barrel through at least the end of 2015, barring some exogenous event driving prices higher.

 

Where the markets will go from here is a question I received several times over the course of the previous week, so I want to address it. Given both the technical and fundamental positions of the major indexes in the US it seems we will remain range bound for the foreseeable future. Earnings season will provide some positive and negative surprises that will likely balance each other out. The situation in Greece could come apart, but even if it does Greece just doesn’t matter all that much to the global financial markets. The rising US dollar seems to be here to stay, as the US is in an entirely different stage of the economic cycle than most of the rest of the developed world. This will be very beneficial to companies that import goods from abroad and not so positive for companies that export their goods from the US as these goods will be much more expensive than they would have been a year ago after accounting for currency movements. China is the real wild card in the global economy. The country is actively trying to tie into other countries’ economies; look at the deals with Mongolia, Russia and the latest with Pakistan. China is trying to tie up the countries near it in deals that make it harder for the US to do business and in some cases China is providing support where the US simply will not due to a lack of desire on the part of the US. The Chinese economy is growing at a 7 percent rate, the slowest in many years, but that only means the government is motivated to look at all angles in which the country can do better financially and we are starting to see the government take action.

 

National News: National news last week was all about earnings season for the first quarter of 2015. There were headlines about where Hillary Clinton decided to eat lunch on her campaign trail and speculation about when the Fed will increase interest rates, but the markets seemed to categorically ignore all of those and focus instead on earnings. Last week was the second week of earnings season for the first quarter of 2015 and financial companies were in the spotlight. Below is a table of the better known companies that released earnings last week with earnings that missed expectations highlighted in red, while earnings that beat expectations by more than 10 percent are highlighted in green:

 

American Express 8% General Electric 3% Netflix 15%
Bank of America -7% Goldman Sachs 42% Philip Morris International 14%
BlackRock 8% Honeywell 1% Reynolds American 9%
Blackstone Group 30% Intel 3% SanDisk -15%
Charles Schwab -8% J B Hunt Transport 8% Schlumberger NV 10%
Citigroup 9% Johnson & Johnson 1% Sherwin-Williams -1%
CSX 0% JPMorgan Chase 4% U.S. Bancorp 0%
Delta Air Lines 2% Kinder Morgan 4% UnitedHealth 10%
Fastenal 2% Mattel 11% Wells Fargo 6%

 

There is more green above than red which is positive, but remember that the expectations companies are either beating or missing are the expectations that were set very low when compared to last quarter. The announcement that stands out the most in the above table is the earnings of Goldman Sachs, which saw its highest earnings for a quarter in the past four years. Investment banking was the strongest division of the company, which makes sense given the number of IPOs and merger and acquisition deals we saw over the quarter and Goldman no doubt had a hand in many of them. On the negative side, SanDisk had a very rough quarter. Business at SanDisk is becoming very difficult with both the strength of competitors in the hard disc space and weakened foreign sales attributed to the appreciation in the value of the US dollar.

 

According to Factset Research, we have now seen 56 (11 percent) of the S&P 500 companies release their results for the first quarter of 2015. Of the 56 that have released, 77 percent have met or beaten earnings estimates, while 23 percent have fallen short of expectations. This 77 percent is a very good start to the quarter as it is higher than it was for the fourth quarter of 2014, which you may remember ended with 75 percent of companies beating earnings expectations. However, as stated before, their earnings expectations numbers are the heavily revised downward figures. This makes the 23 percent who have fallen short of even these low expectations even more worrisome. When looking at revenue of the companies that have reported, 46 percent of the companies have beaten estimates. Revenues are harder to adjust as there is less financial wizardry that can be done to make things look better than they really are. 46 percent beating revenue estimates is a poor number. By comparison, fourth quarter 2014 saw 58 percent of companies beat revenues expectations. In the grand scheme of things investors should look closer at trends in revenue, as opposed to the earnings, and revenues have been a cause for a little concern at this point in the first quarter 2015 earnings cycle. Both of the above mentioned figures are likely to change over the next few weeks as the sheer number of companies releasing earnings will likely sway the overall figures.

 

This week is the start of full swing earnings season as there are nearly 1,000 companies set to report their earnings for the first quarter of 2015. Below is a table of the better known companies that will release their earnings this week, with the releases that have the most potential to impact the markets highlighted in green:

 

3M Chubb Hershey PulteGroup
Abbott Laboratories Coca-Cola IBM Raytheon
Alaska Air D.R. Horton Juniper Networks RLI
Altera Domino’s Pizza Kansas City Southern Sigma-Aldrich
Altria Dow Chemical Kimberly-Clark Simon Property
Amazon Dr Pepper Snapple Knight Transportation Six Flags
Amgen Dunkin’ Brands Manpower Snap-On
Arthur J. Gallagher E*TRADE McDonald’s Southwest Airlines
AT&T eBay Meredith Southwestern Energy
Autoliv Eli Lilly Microsoft Starbucks
Baker Hughes Ethan Allen Interiors Morgan Stanley Stryker
Bank of New York Facebook NetSuite Texas Instruments
Barnes Freeport-McMoRan Newmont Mining Tupperware Brands
BJ’s Restaurants General Motors Nucor Under Armour
Boeing Genuine Parts O’Reilly Automotive United Technologies
Cabela’s Halliburton Pepsi Xerox
Callaway Golf Hanesbrands Piper Jaffray Yahoo!
Caterpillar Harley-Davidson Procter & Gamble Yum! Brands

 

This week really is a hodgepodge of companies releasing earnings. There are a few of the major players in technology such as Amazon, IBM and Microsoft and some of the major industrial companies such as 3M, Caterpillar and Dow Chemical. Consumer facing companies include McDonald’s (which will be closely watched with the new CEO having taken over during the quarter), eBay, Coca-Cola and Pepsi. With such a wide range of companies releasing their earnings this week we should get a pretty good feel for how the quarter overall is going to go after the conclusion of the week.

 

International News: International news focused on two topics over the course of the previous week, one being China and the other being the thorn in Europe’s side—Greece. China made two major moves over the course of the previous week, both of which could have very long term impacts on the markets. The first move was that the China Security Regulatory Commission made a few major changes to the leverage allowed on margin trading accounts, while at the same time shutting down a few key shadow financing schemes that some investors were using to help increase the amount of money they had to invest. This was done primarily because of the drastic run up seen in the main Chinese stock markets over the past 6 months. The Shanghai Se Composite index has increased about 80 percent in the past 6 months and all of this was done on very little strength in the underlying economy, an economy that just last week was shown to grow at the slowest pace in the past 6 years. As the government was taking away with one hand it was giving with another. On Sunday the government in China announced that it was lowering the reserve requirement ratio on banks by 1 percent down to 18.5 percent, which may seem like a small amount, but will give the banks a little more money to lend to borrowers, if the borrowers have enough credit to qualify for the loans. Both of the moves in China over the past week have been somewhat reactive, in that the government is seeing issues and then trying to negate them, but the government is taking almost no steps to shore up the underlying financial problems that led to the issues arising. If every day individuals see the financial markets in China as the only way for them to make it big time in China, they will find ways to invest all they can plus a little more. If the government took actions such as taxing financial gains much more heavily it may do more to stop the speculation than the actions taken last week. Speaking of actions needing to be taken, Greece is once again in the hot seat (and probably never left it).

 

Greece is starting to make more noise about running out of money and needing further bailout funds in order to meet payment obligations as soon as this week. This story is really starting to be like the boy who cried wolf too many times. At some point Greece really will be running out of money, but currently it is impossible to tell if this is the time or if next month might be the time. In an interesting turn of events, which only started to be rumored last week, the Central Bank of Greece ordered all public entities to store all cash reserves with the central bank. This seems like a desperate measure given the fact that the Greek parliament also passed a bill last week that allows the government to borrow funds from government bodies such as the Central Bank to make payments on the Greek debts. While this plan of “robbing Peter to pay Paul” may work in the short term, it will not work for an extended period of time. At some point the Greek government will have to come up with a viable plan as to how Greece will go about structural reforms that will correct the financial imbalances that permeate the Greek economy. While the global financial markets have not hit the panic button on Greece actually defaulting on its debts this time around, the situation is becoming more and more worrisome, as depicted by the increase in the yield on Greek 10-year bonds, which are charted to the right in a chart from Bloomberg.

Greek yeild 4-20-15There is a little spike higher in the chart over the past year each time worries about Greece running out of cash made headlines. After each spike cash has been found and payments made, causing the yields to decline. The market is not being fooled, however, as the overall trend over the past 6 months has been upward with yields moving from 6 percent up to more than 12 percent currently. Adding to the speculation or political posturing this time around is a story out of Germany that Germany is preparing for how it could handle a default by Greece that would still allow the country to remain in the EU and on the Euro as its currency. While I highly doubt this is the first time the financial minds in Germany have played out this scenario, it is interesting that it is now making headlines. Two risks that seem a bit understated in this whole situation with Germany and Greece is that the individuals within each country may just get fed up and force a change in government that derails the entire situation. The current party in charge in Greece won the election by running on a “no further bailouts” and a “we won’t pay” platform, both of which were just political statements that have been broken numerous times in the short time the new government has been in power. At some point the electorate will likely stand up and say “you are not keeping your promises to us, so we would like to replace you with yet another government.” The same situation could unfold in Germany as the German people are getting tired of being dragged into the mud with Greece and continually having to bailout the country. This situation is unlikely to come to an end any time soon as kicking the can down the road is the preferred method of dealing with the issue as it is politically very untenable for either party to do what it would take to fix the situation.

 

Market Statistics: In keeping with the trend of moving up one week only to move lower the following week, last week was no exception as the three major US indexes moved lower after a strong week two weeks ago.

 

Index Change Volume
S&P 500 -0.99% Average
Dow -1.28% Above Average
NASDAQ -1.28% Below Average

 

With the markets moving lower last week on concerns about both China and Greece, as mentioned above, it looks like we will remain range bound for the foreseeable future on the US indexes. Nearly all of the negative move of the week last week occurred on Friday, as investors reacted to several headlines out of Europe and Asia.

 

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
Energy 3.03% Transportation -1.47%
Natural Resources 2.10% Medical Devices -1.33%
Energy 2.01% Industrials -1.30%
Oil & Gas Exploration 2.01% Utilities -1.30%
Basic Materials 0.17% Healthcare -1.19%

Energy and anything remotely energy related turned in strong performance last week as the price of oil moved significantly higher, pulling up all of the oil related industries such as oil and gas exploration, natural resources and basic materials. On the flip side, last week saw investors pull money out of sectors of the markets that had been performing very well during the recent market movements, such as transportation, industrials, utilities and healthcare. Why the money moved out of the above mentioned investments is anyone’s guess, but it could have been investors pulling some profits as we move further into earnings season, a time when volatility is expected to increase.

On top of the standard Fed speculation about when the Fed will start to increase interest rates, last week also saw a resurgence of fear in the fixed income market over Greece and its continued financial hardship and lack of financial reforms:

Fixed Income Change
Long (20+ years) 1.41%
Middle (7-10 years) 0.83%
Short (less than 1 year) 0.00%
TIPS 1.35%

Much of the movement in the US fixed income market was due to the plunging yields in countries such as Germany. The yield on the German Bunds out to 7 years in maturity are currently running a negative yield. This means that anyone investing in them will receive less money at maturity than they put into the bonds—but at least it is relatively safe! Despite seeing large moves into US debt last week the US dollar slid by more than two percent, declining by 2.06 percent against a basket of international currencies, mainly due to the upward move seen in the price of oil. The best performing currency globally last week was the Swiss Franc, which increased by 3.07 percent as investors fled the Euro, yet wanted to remain invested in a European currency. The Japanese Yen was the weakest of the global currencies as it gained only 1.05 percent against the value of the US dollar.

Commodities overall were mixed last week as oil jumped higher:

Metals Change Commodities Change
Gold -0.32% Oil 8.58%
Silver -1.33% Livestock -0.89%
Copper 2.17% Grains -1.22%
Agriculture -0.31%

The overall Goldman Sachs Commodity Index turned in a gain of 4.57 percent last week as oil rallied by 8.58 percent. As mentioned above in the markets section, much of the move in the price of oil was due to a supply report put out by the US government in which crude supplies were shown to have only increased by half of what the market had been expecting. Metals were mixed last week with Silver giving up 1.33 percent, while Gold was down 0.32 percent and Copper bucked the trend, increasing 2.17 percent. Soft commodities all moved lower last week, continuing the slide they have been on for the past 2 weeks.

On the international front last week, the best performance globally was found in Asia. The best performing index last week was the Shanghai based Se Composite Index, which gained 6.27 percent. The lowest performing index last week was found in Germany and was the Frankfurt based Dax Index, which gave up 5.54 percent over fears that Greece may finally default in the near future.

After declining by nearly 15 percent two weeks ago it was only fitting that the VIX last week should bounce back by more than 10 percent. Going into Friday last week the VIX was nearly at the lowest point it has hit thus far during 2015. All of that changed on Friday when the VIX jumped higher by more than 10 percent and had an intraday move in excess of 19 percent. At the current level of 13.89 the VIX is implying a move of 4.01 percent over the course of the next 30 days. As always, the direction of the move is unknown.

For the trading week ending on 4/17/2015, returns in FSI’s hypothetical models* (net of a 1% annual management fee) were as follows:

Last Week Year to Date
Aggressive Model -1.73 % 1.18 %
Aggressive Benchmark -0.40 % 3.66 %
Growth Model -1.36 % 0.57 %
Growth Benchmark -0.30  % 2.89 %
Moderate Model -0.99 % 0.15 %
Moderate Benchmark -0.22 % 2.09 %
Income Model -0.82 % 0.27 %
Income Benchmark -0.11 % 1.09 %

*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 only one change to our models over the course of the previous week and that was to add to our already existing position in Mid Caps, through the use of the Schwab Midcap ETF ticker SCHM. Much of the rally last week in the financial markets seems to be driven by the energy sector, as it may have come off of a very low bottom. Some of you may notice that we have been underperforming the broad indexes over the past two weeks; a large percentage of this underperformance has been due to our underweighting to energy and industries related to energy. The closest investments we have to energy is a few utilities companies we own, other than that we have nominal investments through mutual funds and ETFs in the sector. We continue to evaluate various investment opportunities in the energy sector, but are finding very few that look worthy of an investment, given the risks from earnings season that seem to be on the horizon for the sector as they report a quarter that saw rig counts plummet and oil prices remain much lower than the recent quarter for much of the quarter.

 

Economic News:  Last week was a very busy week for economic news releases with the focus of the week being on the US consumer. There was a single release that missed market expectations by a significant amount (highlighted in red below) and no releases that significantly beat market expectations to the upside:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Neutral 4/14/2015 Retail Sales March 2015 0.9% 1.0%
Neutral 4/14/2015 Retail Sales ex-auto March 2015 0.5% 0.6%
Neutral 4/14/2015 PPI March 2015 0.2% 0.2%
Neutral 4/14/2015 Core PPI March 2015 0.2% 0.1%
Negative 4/15/2015 Empire Manufacturing April 2015 -1.19 7.00
Neutral 4/15/2015 NAHB Housing Market Index April 2015 56.00 55.00
Neutral 4/16/2015 Initial Claims Previous Week 294K 280K
Neutral 4/16/2015 Continuing Claims Previous Week 2268K 2312K
Slightly Negative 4/16/2015 Housing Starts March 2015 926K 1.04M
Neutral 4/16/2015 Building Permits March 2015 1.04M 1.08M
Slightly Positive 4/16/2015 Philadelphia Fed April 2015 7.50 6.00
Neutral 4/17/2015 CPI March 2015 0.2% 0.3%
Neutral 4/17/2015 Core CPI March 2015 0.2% 0.2%
Slightly Positive 4/17/2015 University of Michigan Consumer Sentiment Index April 2015 95.90 94.00

Data for table from Econoday.com, Bloomberg and Yahoo Finance

 

Last week started on Tuesday with the release of retail sales for the month of March, which came in very close to market expectations, but slightly below expectations. Also released at the same time on Tuesday was the Producer Price Index (PPI), which came in nearly on top of market expectations. On Wednesday the major negative announcement of the week was released, that being the Empire Manufacturing Index for the month of April, which was expected to show a decent amount of growth, but instead posted a contraction for the month. We have been seeing weakness now for several months in the manufacturing data and this is just the latest point in what has now turned into a worrisome trend. On Thursday the standard weekly unemployment related figures were released with initial claims a little better than expected, while continuing claims were slightly worse than expected. The first of the housing related figures for the month of March were also released with housing starts and building permits. Housing starts missed expectations, while building permits were close to expectations, leaving most options of the housing market unchanged by the new data. Later during the day on Thursday the Philly Fed released its business conditions index and it came in very close to expectations leading to little or no noticeable reaction by the markets. On Friday the data that was released was overshadowed by both China and Greece, but the Consumer Price Index (CPI) was released and showed that prices were increasing at a slower pace than most members of the Fed would like going into a time period of increasing interest rates. Wrapping up the week on Friday was the release of the University of Michigan’s Consumer Sentiment Index for the month of April (first estimate), which indicated that consumers were more positive about their spending in April than they were in March. Some of this confidence may have been due to tax refund checks coming in the mail and people having a little extra money during the month of spend.

 

This week is a slow week for economic news releases. The releases highlighted below have the potential to move the overall markets on the day they are released:

 

Date Release Release Range Market Expectation
4/22/2015 Existing Home Sales March 2015 5.05M
4/23/2015 Initial Claims Previous Week 288K
4/23/2015 Continuing Claims Previous Week 2330K
4/23/2015 New Home Sales March 2015 520K
4/24/2015 Durable Orders March 2015 0.50%
4/24/2015 Durable Goods -ex transportation March 2015 0.40%

Data for table from Econoday.com, Bloomberg and Yahoo Finance

 

This week starts on Wednesday with the release of existing home sales for the month of March, which is expected to come in just over the 5 million level. Given the real estate figures we saw last week this figure looks in line with what we have been seeing. On Thursday the standard weekly unemployment related figures are set to be released with expectations of initial claims falling with continuing claims likely to have increased a little over the past week. Also released on Thursday is the new home sales figure for the month of March, which will likely move with the same direction and magnitude as the existing homes sales figure earlier in the week. On Friday the two releases that have the greatest potential to move the markets are set to be released, those being durable goods orders. Durable goods orders are a measure of durable goods: big ticket items such as house hold appliances, cars and planes. They are a good signal about the health of the overall economy because they are typically items that do not just break, but rather wear out and are replaced over time. It is for this reason that they are a good signal. If something does not have to be replaced immediately during economic hard times, people will put it off. If times are good and the economy is doing well, people are more willing to outlay larger sums of money on items that need to be replaced. Expectations are for only half a percent increase during March, which is low on the overall durable goods orders. Orders excluding transportation are expected to increase even less at 0.4 percent. While these orders can swing around a lot with the airline companies buying planes at odd points during the year, the market will be watching very closely to see that these orders do not go negative as this would be a very negative sign for the health of the US economy. If we see a negative print, however, the markets may react positively as it would further signal that the Fed may not be able to start increasing interest rates in June, having to put off the rate increase until September at the earliest.

 

Fun fact of the week—China materials demand

 

According to author and Scholar Michael Pettis, a Senior Associate at the Carnegie Endowment for International Peace and a finance professor at Peking University’s Guanghua School of Management, China demands the following global percentages of raw materials, while only having 19 percent of the total global population:

Cement = 53.2% of global demand

Iron ore = 47.7%

Coal = 46.9%

Pigs = 46.4%

Steel = 45.4%

Lead = 44.6%

Zinc = 41.3%

Aluminum = 40.6%

Copper = 38.9%

Eggs = 37.2%

Nickel = 36.3%

Source: Business Insider http://www.businessinsider.com/facts-chinese-consumption-2011-5#ixzz3XsZp79ge

For a PDF version of the below commentary please click here Weekly Letter 4-13-2015

Commentary at a glance:

-Major US indexes rallied last week, but remain range bound.

-VIX closed the week at the lowest point so far during 2015.

-Hillary Clinton has officially jumped into the 2016 Presidential race.

-Earnings season for the first quarter of 2015 has officially kicked off.

-The first fed interest rate move is still expected to be in September of this year.

 

Market Wrap-Up: All three of the major US indexes remain range bound after they gained in value last week, but had started the week near the low end of the trading range. While the indexes were moving higher the VIX was moving lower in one of the steepest declines we have seen so far during 2015. The charts below are of the three major US indexes in green with their respective wide trading ranges drawn by the red lines. The VIX (lower right pane below) is drawn with the index in green and the one year average level of the VIX drawn in red:

4 charts 4-13-15

The NASDAQ (lower left pane above) is the strongest of the three major indexes when looking from a technical perspective. It is now very close to the upper bound of the most recent trading range and could challenge the level at some time this week. If it successfully breaks above the upper bound level there is one other small point of resistance that would be considered: the high point reached during the middle of March. This level, however, also corresponds very closely with the all time high level for the NASDAQ, which was reached back before the technology bubble of 2000. Chances are that the NASDAQ will pull up to at least this level as traders and investors alike enjoy seeing investments make new all time highs. This one will have been more than 15 years in the making. The S&P 500 (upper left pane above) and the Dow (upper right pane above) are virtually tied from a technical perspective, closing last week in the upper half of the trading range. As far as upside resistance, both the S&P 500 and the Dow will potentially encounter resistance both at the high point from last month as well as at the red line, which is drawn above at the top of the trading range. While all of these moves higher were occurring last week, the VIX was headed in the opposite direction, falling to the lowest point we have seen so far during 2015, well below the average level for the VIX over the past 52 weeks. The two most common questions I have been receiving lately have been: where do we go from here and are we overvalued on the markets?

 

At this point the markets seem like they are at lofty valuations; this is due to a number of factors. The first factor is that the era of a zero rate for the Fed funds rate will be shortly coming to an end. Second is that earnings season for the first quarter of 2015 is starting and it is expected that the overall earnings for the various indexes will see one of the sharpest contractions we have seen for several years, with much of the decline due to the energy sector, which has revised expectations lower by so much that most companies will literally fall over the bar that has been set at such a low level. Third is that the market is not cheap, as measured by the Forward PE ratio. The PE ratio is a measure of current price divided by earnings. In the case of the index, all of the individual component companies are added together to arrive at the overall PE ratio for the index. The Forward PE ratio looks at the projected earnings for the next 12 months and uses this figure as the divisor. When the Forward PE ratio is low the market is considered “cheap” and, vice versa, when the PE ratio is large it is considered expensive. According to JP Morgan, the current Forward PE ratio for the S&P 500 is 16.9, which is above the 25 year average of 15.7. To give a little perspective, the Forward PE ratio for the S&P 500 briefly went under 10 back at the market lows of 2009. The fourth reason for the lofty valuation is that the US economy is not growing at a pace that is consistent with the level of growth we have been seeing in many of the main companies that are the driving force behind the recent market movements. In looking at everything above, it does not mean that the market will inevitably correct, but rather that the markets pushing substantially higher from here seems unlikely until we get some much needed change. Going forward we are likely to see the major indexes stay within or very close to their respective trading ranges. This also plays into the level of the VIX as it also does not see movements in the next 30 days that would likely push any of the indexes out of their trading ranges.

 

National News: National news last week was all about politics and who will or who will not be running for President in 2016. Hillary Clinton made the announcement over the weekend that she will be seeking the Democratic nomination for the Presidential election in 2016. While she looks to be a formidable opponent, she did lose out to a relatively unknown contender back in 2008, named Barack Obama, as well as former Senator John Edwards in several key battle ground states leading to the official nomination, so it may not be as much of a shoe-in for Hillary as some people seem to be anticipating this time around. According to the latest figures from the New York Times other Democratic contenders include Martin O’Malley, Jim Webb and Lincoln Chafee, all of which would have a very hard time coming up with the funds needed to go head to head with Clinton. According to a senior adviser with the Ready for Hillary campaign, it is estimated internally that the combined 2016 election season could cost as much as $1.7 billion, only about $56 million more than the 2008 campaign for President. If the number of voters remains pretty steady between 2016 and 2008, the turnout would likely be about 57 percent of eligible voters, or 132 million people. The resulting total cost per vote could come in as high as $13 per vote by the time all is said and done. The Republican side of the ticket looks much more interesting as there are a number of candidates and potential candidates.

 

For the Republicans we have seen Ted Cruz, Rand Paul and Marco Rubio all announce that they are seeking the Republican nomination for President. Yet to announce is Jeb Bush, Scott Walker, Chris Christie, Rick Perry and Bobby Jindal, as well as a host of others who may or may not announce their candidacy. It will be a full scale dog fight on the Republican side and a fight that will likely lead to the final candidate being much weaker than if they had not gone through the nomination process within the Republican Party. The early polls (I can’t stress enough that these are very early), show that Clinton is the front runner against any of the Republican candidates, as she has been even prior to her announcing. The real problem for the 2016 election that all candidate face regardless of which party they belong too is that many Americans just do not think the government is functioning the way it should be and they point to all politicians for causing the problems, not just one side or the other. When every day people see threats of a government shutdown being used as a political tool or the amount of pork that is added to nearly every bill that gets through to a vote, they are not happy about the state of our political system. Maybe that is why Frank Underwood is receiving many write in nominations in polls around the country, because at least in his House of Cards world he seems to get things done! The markets will be watching the upcoming election somewhat lazily for the next few months and get much more serious about it early next year as anything that is said by any of the candidates at the current time will likely not be taken seriously.

 

More important to the markets than politics currently is the results from the first quarter 2015 earnings season, which have already started to roll in. Below is a table of the better known companies that released earnings last week with earnings that missed expectations highlighted in red while earnings that beat expectations by more than 10 percent are highlighted in green:

 

Alcoa 8% Family Dollar Stores 1% Rite Aid 71%
Bassett Furniture 40% Greenbrier Company 28% Walgreens 26%
Bed Bath & Beyond -1% Pier 1 Imports 3% WD-40 6%

 

Alcoa officially kicked off earnings season last week with a beat on earnings per share coming in at $0.28, while analysts had been expecting $0.26. However, the company missed expectations on revenues per share and it forecasted global aluminum demand to be lower than first thought for all of 2015. Commodities prices have been falling and with them the mining and energy stocks are likely to show that they had a rough first quarter of 2015. Alcoa appears to not be an exception. Rite-Aid and Walgreens both showed great results for the first quarter of 2015 as there was very little material impact on their earnings from the strong US dollar as much of the business is done here in the US. The only downer last week was Bed Bath & Beyond, which saw same store sales and overall revenues increase, but at a lesser rate than analysts were anticipating. It is still much too early to deduce anything about how the overall quarter will go with the small number of companies that have announced their earnings, but the quarter so far seems to be headed in the correct direction.

 

This week is a ramp up week for earnings season as we start to head toward the full swing of earnings season over the next few weeks. Below is a table of the better known companies that will release their earnings this week, with the releases that have the most potential to impact the markets highlighted in green:

American Express General Electric Netflix
Bank of America Goldman Sachs Philip Morris International
BlackRock Honeywell Reynolds American
Blackstone Group Intel SanDisk
Charles Schwab J B Hunt Transport Schlumberger NV
Citigroup Johnson & Johnson Sherwin-Williams
CSX JPMorgan Chase U.S. Bancorp
Delta Air Lines Kinder Morgan UnitedHealth
Fastenal Mattel Wells Fargo

 

This week is all about financials as there are numerous large financial institutions set to release their earnings from the first quarter of 2015. Of particular interest will be the charges that related to the strong US dollar and this, if present and meaningful, will likely cause problems for other companies that release earnings in the coming weeks. In fact, other than the impact of falling energy prices on earnings, the US dollar will be the second most watched item during this earnings season and it could have a very large impact.

 

International News: International news last week held very few headlines that the markets seemed to care about. Iran made headlines early during the week as the Supreme leader seemed to make a few headlines that undercut some of the work that had been done at the nuclear negotiations that ended two weeks ago. This may have had an impact on the price of oil and been one of the catalysts for the price movement, but it seems unlikely because anything concrete in the situation with Iran is still months if not years away from being finished. Brazil made headlines over the weekend as there were large protests against President Dilma Rousseff, as she struggles to maintain an orderly government in the face of political unrest within her country. The unrest, however, seems to be settling down a little as the crowds that rallied over the weekend against her were much smaller than they were a few short weeks ago. Most of the rest of the world was steady last week with the Europeans still fighting between themselves and Greece and with the ECB continuing to pump money into the system—a system that is broken, but not in dire need of fixing any time soon, which means that it will not even be worked on until sometime in the future when things really start to come apart.

 

Market Statistics:

Index Change Volume
NASDAQ 2.23% Below Average
S&P 500 1.70% Average
Dow 1.66% Average

 

After a flat week two weeks ago it was time for the markets to move higher last week, if they stuck with the up and down theme that seems to have pretty well solidified over the past month. The markets did not fail to keep the trend going as they moved higher over the course of the week. Volume last week was about average as we are moving into earnings season, a time when volume can be heightened on certain stocks each day as there is reaction to various announcements.

 

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
Biotechnology 5.23% Residential Real Estate -2.71%
Pharmaceuticals 4.47% Real Estate -2.18%
Energy 3.87% Home Construction -1.43%
Oil & Gas Exploration 3.24% Telecommunications -0.83%
Natural Resources 2.98% Regional Banks -0.23%

Biotechnology and Pharmaceuticals completed the flip last week, jumping from the bottom 5 performing sectors back up to the top 5 performing sectors over the course of just a single week, thanks in large part to several merger and acquisition announcements. Energy also had a good week as oil increased by more than 5 percent, also thanks to several merger announcements that could have signaled the bottom for the price of oil. Real Estate had a tough week last week as it was the single worst sector of the markets, despite the declining interest rates on 30 year mortgages, as they fell to a multiple month low.

With nothing more than continued speculation about the Fed and when it will start to increase interest rates, last week was a pretty tame week for fixed income trading:

Fixed Income Change
Long (20+ years) -0.85%
Middle (7-10 years) -0.31%
Short (less than 1 year) 0.02%
TIPS -0.09%

With the rest of the world seemingly in a loosening stance for their currencies the US dollar was the largest benefactor last week, gaining 1.79 percent against a basket of international currencies. Moving from the worst currency two weeks ago to the best currency last week was the Australian Dollar, which gained 1.23 percent against the value of the US dollar. Much of this move was due to increasing demand for the raw materials Australia produces. Not surprising given the large amount of lending that is going on in Europe from the ECB, the Euro was the weakest of the major global currencies last week, giving up 2.82 percent against the value of the US dollar.

Commodities overall were mixed last week as oil jumped higher:

Metals Change Commodities Change
Gold 0.60% Oil 5.09%
Silver -1.56% Livestock -1.03%
Copper -0.03% Grains -2.93%
Agriculture -1.85%

The overall Goldman Sachs Commodity Index turned in a gain of 1.57 percent last week as oil rallied by 5.09 percent. As mentioned above, much of the movement in the price of oil seemed to be after the announcement from Shell that it was buying the BG group, in what may be the first of many major deals that could be coming in the oil industry if the major oil companies think the bottom for oil is now behind us. Metals were mixed last week with Silver giving up 1.56 percent, while Gold was up 0.60 percent and Copper decreased 0.03 percent. Soft commodities all moved lower last week, giving up more than 1 percent across the board as they too seem like they may have already put in a bottom for the recent downturn.

On the international front last week there were no major world indexes that declined in value. The lowest performing index last week was found in Taiwan and was the Taiwan Weight Index, which gained only 0.18 percent. Hong Kong turned in the best performance of the week as the Hang Seng Index advanced by 7.90 percent, after several holidays over the past two weeks.

The VIX plummeted last week, falling by 14.25 percent, thanks in large part to the markets moving higher and the potential pitfalls for the markets seeming to dissipate over the course of the past week. The other aspect of the markets that is helping to drive the VIX is the time of the year as we are now officially moving into summer, a time when the markets trade on typically low volume and shrug off most of the negative news. At the current level of 12.58 the VIX is implying a move of 3.63 percent over the course of the next 30 days. As always, the direction of the move is unknown.

For the trading week ending on 4/10/2015, returns in FSI’s hypothetical models* (net of a 1% annual management fee) were as follows:

Last Week Year to Date
Aggressive Model 0.89 % 2.97 %
Aggressive Benchmark 1.79 % 4.07 %
Growth Model 0.75 % 1.96 %
Growth Benchmark 1.38  % 3.20 %
Moderate Model 0.50 % 1.16 %
Moderate Benchmark 0.99 % 2.31 %
Income Model 0.32 % 1.10 %
Income Benchmark 0.50 % 1.20 %

*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 several changes to our models over the course of the previous week. The first changes related to the US dollar as we lightened our position in both Profunds Rising Dollar Fund (RDPIX) as well as the Rydex Strengthening Dollar Fund (RYSBX). We also sold our position that was remaining in the Semiconductor sector as the strong performance of this sector appears to have run its course. With some of the proceeds from the various sales we initiated a position in the Wisdomtree International Dividend Hedge Equity fund. The fund invests in a broad range of companies that pay dividends around the world while at the same time taking out the currency risk associated with the countries in which the companies are domiciled. This is a good way to invest internationally while the US dollar is strengthening since it means that many of the other global currencies are moving lower. We continue to watch the oil market closely to see if there is a good entry point for an initial investment in the sector.

 

Economic News:  Last week was one of the slowest weeks we have seen in a long time for economic news releases. There was nothing new in any of the releases as they all came in very close to expectations:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Neutral 4/6/2015 ISM Services March 2015 56.50 56.90
Neutral 4/8/2015 FOMC Minutes March Meeting
Neutral 4/9/2015 Initial Claims Previous Week 281K 285K
Neutral 4/9/2015 Continuing Claims Previous Week 2304K 2395K

Data for table from Econoday.com, Bloomberg and Yahoo Finance

 

Last week started off on Monday with the release of the ISM Services Index, which came in almost exactly on the expected number. This data, combined with the overall ISM release from two weeks ago, seems to point to the economic slowdown really being the manufacturing side of the US economy as the services side continues to grow at a steady rate. On Wednesday the FOMC meeting minutes from the March meeting were released and held little new information. The minutes confirmed the well known thoughts that the Fed is very divided as to when to start raising interest rates. There were as many votes for the June meeting as there were for a date later than June. The market still seems to have the odds on September at this point, but as always that date could change if the economic data released over the next few months continues to show weakness. Last week wrapped up on Thursday with the release of the standard weekly unemployment related figures for the previous week, which showed that both continuing and initial jobless claims came in slightly below market expectations, but not by enough to have a noticeable impact on the overall markets.

 

After such a slow week last week, this week seems to be playing a little catch-up as there are numerous releases that could have a noticeable impact on the markets. The releases highlighted below have the potential to move the overall markets on the day they are released:

 

Date Release Release Range Market Expectation
4/14/2015 Retail Sales March 2015 1.0%
4/14/2015 Retail Sales ex-auto March 2015 0.6%
4/14/2015 PPI March 2015 0.2%
4/14/2015 Core PPI March 2015 0.1%
4/15/2015 Empire Manufacturing April 2015 7.00
4/15/2015 NAHB Housing Market Index April 2015 55.00
4/16/2015 Initial Claims Previous Week 280K
4/16/2015 Continuing Claims Previous Week 2312K
4/16/2015 Housing Starts March 2015 1.04M
4/16/2015 Building Permits March 2015 1.08M
4/16/2015 Philadelphia Fed April 2015 6.00
4/17/2015 CPI March 2015 0.3%
4/17/2015 Core CPI March 2015 0.2%
4/17/2015 University of Michigan Consumer Sentiment Index April 2015 94.00

Data for table from Econoday.com, Bloomberg and Yahoo Finance

 

This week starts off on Tuesday with the release of the retail sales figure for the month of March, which is expected to show a small increase of about 1 percent overall with sales excluding auto sales expected to increase by 0.6 percent. If these numbers are too high and the actual figures come in below expectations, it could be seen as bad for the economy, while good for keeping interest rates low for longer. Also released on Tuesday is the Producer Price Index (PPI) for the month of March, which is expected to show that inflation is very tame at only 0.2 percent. This is far below the level the Fed would like to see as part of their dual mandate and flies in the face of increasing interest rates. On Wednesday the latest manufacturing data is set to be released with the Empire Manufacturing index for the month of April. Expectations are for a reading of 7.0, hardly any change from the 6.9 seen during March. If this were to end up being the number it would be a positive development in the US economy as manufacturing data has recently been pretty bad. On Thursday, in addition to the standard weekly unemployment related figures, two pieces of housing information are set to be released: the housing starts and building permit data for the month of March, both of which are expected to come in at just over 1 million units. Later during the day on Thursday the Philadelphia Fed is set to release its index that measures business conditions in the greater Philly area. Expectations on the release are that things will have picked up a little during April when compared to March, and if this does not turn out to be the case it could be a negative sign for the overall US economy. On Friday the Consumer Price Index (CPI) for the month of March is set to be released with expectations that prices will have remained relatively flat at the consumer level despite the price of energy and gasoline having increased slightly. This data along with the PPI is really leaving the Fed in a tough spot; typically when inflation rates are too low the Federal Reserve would lower interest rates in order to spark demand. With rates at zero it cannot very easily lower rates without some massive round of quantitative easing. We have recently been seeing the price indexes moving ever closer to zero, at which time the Fed will have a very hard decision to make. Wrapping up the week this week is the release of the University of Michigan’s Consumer Sentiment Index for the month of April (first estimate), which is expected to show that the US consumer is more confident now than at the end of March. This index would have to have a very large deviation from expectations for the markets to really take notice. In addition to the scheduled releases there are also six different Federal Reserve officials giving speeches this week as they try to help guide the market regarding the way the Fed is currently looking at the data.

 

Fun fact of the week—Hillary Clinton was a Republican.

 

In her book Living History Hillary Clinton talks about her early political life, which was shaped by her die-hard Republican father. She even went as far as to be elected President of Wellesley College’s Young Republicans Club.

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