For a PDF version of the below commentary please click here Weekly Letter 6-29-2015

Commentary at a glance:

-The US markets moved lower as the clock continues to tick down on Greece.

-Greece-Greece-Greece; ENOUGH ALREADY!

-US Supreme Court was very active during the last full week of its current session.

-Economic news last week, in aggregate, came in at market expectations.

 

Market Wrap-Up: Greece continued to be the driving force behind the market movements globally last week with a deal potentially within reach at the start of the week, only to see the week come to an end with no deal and few prospects for one. A referendum vote has been called for and will be held in Greece on July 5th. 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 6-29-15

From a technical standpoint the global financial markets, including the US markets, continue to chop back and forth as everyone awaits an outcome in Greece. Technically, the NASDAQ (lower left pane above) broke down the most last week, having moved from well above its most recent trading range all of the way back down into its range. Looking at a time frame longer than one week, however, the NASDAQ still remains the strongest of the three major US indexes, but the S&P 500 (upper left pane above) seems to be gaining in relative technical strength. The Dow (upper right pane above) remains the weakest of the three major indexes as it struggles to get back to and stay above the half way mark of its trading range. Volume last week was not concerning given what is going on and it is expected to be even lower this week, despite June 30th falling during this week. Typically, Fourth of July week is a very slow week for the financial markets in the US as many of the large money managers and institutional investors take some early summer vacation time. Until we get a meaningful breakout one way or the other on two of the three major US indexes, it looks like we will remain range bound. At this point it seems like the downside risk outweighs the upside potential in the near term given the uncertainty in Europe and the uncertainty as to when the US Federal Reserve will start to increase interest rates. One of the more puzzling aspects of the current market environment is the current level of the VIX.

 

The VIX is commonly referred to as the fear gauge for the overall markets. It looks at the option activity on the S&P 500 within 30 days to judge where the smart money is placing bets on the future movements of the markets. When there is a lot of uncertainty or fear about the markets the VIX moves higher and vice-versa when there is a low level of uncertainty. The VIX is currently running under the average level of the VIX that we have seen over the past year and yet there appears to be all of these outstanding items that should be causing uncertainty. The VIX can move very quickly and this may be the case this time around, but at the current levels the VIX seems to be taking a very lackadaisical approach to the ongoing situations. Previously when we have seen an uptick in chatter about Greece over the past several years the VIX has moved up, noticeably stopping in the upper 20’s or low 30’s, which would be at least a 100 percent gain from the current sub 15 level.

 

International News: International news last week was all about Greece and while there were other headlines around the world none came even close to having the same effect on the markets as Greece. The end game in Greece appears to be very near; creditors have dug in their heels on what they expect from Greece in order to release more funds and the Greek government has flatly rejected their proposals. Greece at times does not even seem to be taking the situation seriously, as it was announced early last week that the latest Greek proposal sent to the international community was actually an old proposal and that Greece had messed up when trying to send over the new proposal. Once the correct proposal had been sent off the Europeans dug into reading it, but at the heart of the proposal Greece was proposing very little in terms of cuts to spending, while banking everything on increased tax revenues and other forms of income. This did not fool anyone in the international lending community as Greece has always had very poor performance on tax collections in terms of getting what is owed. In the end, the last proposal from Greece was taken more as a delaying ploy than an actual proposal by the lending community. This prompted the IMF (the organization which is owed a 1.6 billion euro payment on June 30th) to reiterate that there will be no extension of the deadline for payment.

 

At the end of the week the talks had not fully fallen apart, but they had not gone very well either. Late Friday night the Greek government called off the negotiations in favor of a referendum vote in Greece. Essentially, the government announced that it would put the creditor’s demands to the people of Greece to be voted on by everyone and not just the government. The date that has been set for the referendum vote is July 5th, which is curiously past the June 30th deadline. The government in Greece has voiced its opinion that the people of Greece should vote against the measure. This turn of events is very intriguing and really a last ditch effort by the Greek government to get out of the blame game over what happens to Greece. One aspect of the referendum vote that could cause a great deal of uncertainty is that if the people choose to vote for the deal. It would in a sense be a vote of no confidence in the current Greek government. This would mean the government that has been in place and trying to get a deal for Greece may be thrown out and a new government would have to be formed. Over the weekend the latest developments were that the ECB (European Central Bank) decided not to increase its emergency lending program to Greece, thus causing capital controls to immediately be put into place. Capital controls are a very rough economic policy that says how much money people in a given country may take out of the banks during a given time period. In this case Greek citizens are allowed to take 60 euros out of the bank per day. As you could imagine, there are long lines at the ATM machines throughout Greece and some of the machines are starting to run out of money. The panic is starting to set in with the everyday people of Greece, people who probably do not really understand what is going on, but now are starting to see what Greece could be like if the country does not come around to the proposals from its lenders. The vote right now looks like it is about 50/50 for and against, so it will likely be very close with the potential fate of the Euro as a common currency hanging in the balance.

 

National News: National news last week was largely outshined by the international happenings in Europe, but there were a few items that made headlines that the market took note of. The first was an action taken by the US Supreme Court, which upheld a controversial portion of the Affordable Care Act (ACA), and cleared the way for the law to continue to move forward despite much objection from the Republicans. This ruling most immediately impacted the healthcare providers as an index of healthcare provider companies saw an almost immediate jump of 3.5 percent on the announcement of the ruling. Healthcare, in general, over the longer term has been a strong investment and looks to be strong going forward given the aging demographic and health needs of the US population. While the ACA may be very controversial, at this point after this court ruling it seems it would be very difficult if not impossible to unwind the legislation. The other big headline last week from the Supreme Court was its legalization of gay marriage across the US, ending the bans in place in 14 states, which until then had made gay marriage illegal. There was little noticeable financial impact of the ruling on the financial markets as many states and companies already recognized gay marriage; the ruling from the high court was more of a formality. The final news nationally last week that continued to make headlines was about the Fed and when it might increase interest rates. The table to the right is an updated Fed rate watch table showing the current odds as calculated by the CBOE as to when the Fed will start to raise interest rates. Over the course of the last week the odds were put further out into the future, when compared to two weeks ago. However, during a speech last week a member of the Fed indicated that there was still the potential for two interest rate increases during 2015. If two rate hikes are in the cards, the most likely meetings would be September and December since each of these two meetings have a press conference following the meeting where Chair Yellen would be able to explain her reasoning.

Fed rates 6-29-15

Market Statistics: All three of the major US indexes moved higher over the course of the previous week with much of the movement seen during the middle three days of trading. Volume overall was above average, which was not surprising given the Fed statement on Wednesday and the continued uncertainty over the situation unfolding in Greece:

 

Index Change Volume
Dow -0.38% Average
S&P 500 -0.40% Above Average
NASDAQ -0.71% Average

 

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
Home Construction 2.30% Global Real Estate -6.03%
Healthcare Providers 2.14% Semiconductors -4.09%
Regional Banks 0.83% Real Estate -3.35%
Consumer Discretionary 0.39% Technology -3.31%
Financial Services 0.25% Utilities -3.27%

With the positive numbers coming out about the US housing market last week it was not surprising to see that home construction was the top performing sector of the markets. Healthcare providers also got a bit of a boost last week as the US Supreme court ruled in favor the Affordable Care Act, thus keeping many people who would otherwise have been uninsured within the insurance and healthcare pool. On the flip side, real estate really took a hit last week as interest rates moved higher, thanks in large part to uncertainty in the fixed income market as it relates to Greece. Technology in general had a rough week with the semiconductor space suffering the most due to Micron Technologies, one of the largest semiconductor companies in the world, falling short of earnings expectations and revising its full year guidance below estimates. On Friday the stock fell by more than 20 percent, single handedly driving the sector and technology in general lower. One odd aspect to the sectors mentioned above is the drop we saw in Utilities. Typically Utilities are considered a very defensive sector of the market, but last week the fear of rising interest rates outweighed any gain that would have otherwise occurred due to the risk off trade that played out during the end of the week.

The US fixed income market failed to make it three weeks in a row of gains last week, declining across the board as uncertainty over the fate of Greece played a large part in the movements of the fixed income markets around the world:

Fixed Income Change
Long (20+ years) -3.23%
Middle (7-10 years) -1.57%
Short (less than 1 year) -0.01%
TIPS -1.04%

The US dollar broke its recent three week downturn last week, gaining 1.3 percent as uncertainty surrounding the situation in the EU started to be felt in the currency markets.  The Canadian dollar was the best performing of the major global currencies as it gave up 0.43 percent against the value of the US dollar. The weakest performing currency of the major global currencies not surprisingly was the Euro last week as it gave up 1.73 percent against the value of the US dollar. As the end game continues to play out in Greece it seems the Euro could go either up or down. It could move higher if the markets feel Greece will leave and in effect the Eurozone would get rid of its weakest link. Or, it could move lower if investors think Greece leaving is just the beginning of the end for the common currency.

Last week commodities were mixed, but the real story was the jump we saw in the Grains market:

Metals Change Commodities Change
Gold -2.22% Oil -0.57%
Silver -2.01% Livestock -1.61%
Copper 0.44% Grains 9.61%
Agriculture 3.89%

The overall Goldman Sachs Commodity Index turned in a gain of 0.92 percent last week despite oil moving lower. Oil gave up 0.57 percent last week as the focus of the world seemed to be on Europe more so than the Middle East and the Iranian negotiations over its nuclear ambitions now look to be headed into overtime.

Metals were mixed last week with Gold giving up 2.22 percent, while Silver decreased 2.01 percent and Copper bucked the trend, advancing by 0.44 percent. Soft commodities were very mixed last week with Livestock falling for the third week in a row, giving up 1.61 percent, while Grains rocketed 9.61 percent and Agriculture jumped higher by 3.89 percent. The move in Grains was the largest weekly gain since July of 2012 when we saw a week with a gain of more than 10 percent. The main driving force behind the move in grains is the wet weather that has been hitting the Midwest, hampering various aspects of the growing and harvesting season in the heart of the US growing region.

On the international investing front, a country that rarely sees either the top or bottom performance, France, made the top of the list.  The Paris based CAC-40 turned in a gain of 5.06 percent last week, during a week that saw much of Europe rally on hopes of the Greek situation coming to a positive conclusion. On the flip side, the worst performing index of the major global financial indexes last week was found in China—for the second week in a row. The Shanghai based Se Composite Index fell 6.37 percent over the course of the previous week. Over the course of the past two weeks the index has now declined by nearly 20 percent as the government continues to try to reign in speculative investing in the financial markets.

Last week the VIX moved in near lock step with the news coming out of Europe. It started the week by moving down as an agreement seemed to be within reach. At the middle point of the week the VIX started to trend higher, ultimately ending the week very close to where it started, gaining just 0.43 percent on a week over week basis. At the current level of 14.02, the VIX is implying a move of 4.05 percent over the course of the next 30 days; as always, the direction of the move is unknown. I suspect the VIX will move significantly higher over the coming days if the situation in Greece is not worked out, but the move will likely only be temporary as any resolution to the situation will likely result in the VIX moving back down.

Economic News:  Last week the focus of the economic news releases was the health of the US economy overall. 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 6/22/2015 Existing Home Sales May 2015 5.35M 5.26M
Negative 6/23/2015 Durable Orders May 2015 -1.80% -0.50%
Neutral 6/23/2015 Durable Goods -ex transportation May 2015 0.50% 0.60%
Neutral 6/23/2015 New Home Sales May 2015 546K 525K
Neutral 6/24/2015 Q1 2015 GDP – Third Estimate Q1 2015 -0.20% -0.20%
Neutral 6/25/2015 Initial Claims Previous Week 271K 271K
Neutral 6/25/2015 Continuing Claims Previous Week 2247K 2210K
Neutral 6/25/2015 Personal Income May 2015 0.50% 0.50%
Slightly Positive 6/25/2015 Personal Spending May 2015 0.90% 0.70%
Slightly Positive 6/26/2015 University of Michigan Consumer Sentiment June 2015 96.1 94.8

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

 

Last week started on Monday with the release of the existing home sales figure for the month of May, which came in at 5.35 million units, very close to market expectations, signaling that the US housing market continues to move forward. On Tuesday the sole negative release of the week was released, that being the durable goods orders change figure for the month of May, which showed a contraction of 1.8 percent compared to expectations of a 0.5 percent contraction. Much of the contraction was due to a slowdown in both auto sales as well as planes. With transportation removed from the equation, durable goods orders increased by 0.5 percent during the month, in line with expectations. Released later during the day on Tuesday was the new home sales figure for the month of May, which came in at just under 550,000 units. On Wednesday the third and final revision to the first quarter 2015 GDP estimate was released and, as expected, it showed a contraction of 0.2 percent, a full half of a percent improvement from the 0.7 percent contraction shown as the second estimate. While an economic contraction is not what economists ever really want to see, with the first quarter contraction now looking so shallow it seems the US economy still has a chance at growing overall GDP between 2 and 3 percent during 2015. On Thursday initial and continuing jobless claims both came in close to expectations and the markets failed to even take note. Also released on Thursday was the latest personal income and spending figures for the month of May, which showed income growing slightly, gaining just 0.5 percent while personal spending beat expectations and rose by 0.9 percent during the month. The 0.9 percent represents the strongest spending figure since January of 2014 and, if it is the start of a trend, could represent a key element in determining when the Fed decides to start to increase interest rates. Wrapping up the week last week was the release of the University of Michigan’s Consumer Sentiment Index for the month of June, which ticked up slightly and came in a little better than expected at 96.1 versus expectations of 94.8. If we continue to see spending and sentiment increase we could see the economy turn around in the second half of the year as so many economists are predicting.

 

This week is a pretty busy week with Friday being a market holiday due to the fourth of July, with the typical Friday releases being pushed up to Thursday. The releases highlighted below have the potential to move the overall markets on the day they are released:

 

Date Release Release Range Market Expectation
6/29/2015 Pending Home Sales May 2015 1.40%
6/30/2015 Case-Shiller 20-city Index April 2015 5.60%
6/30/2015 Chicago PMI June 2015 50.00
6/30/2015 Consumer Confidence June 2015 97.50
7/1/2015 ADP Employment Change June 2015 220K
7/1/2015 ISM Index June 2015 53.20
7/2/2015 Initial Claims Previous Week 270K
7/2/2015 Continuing Claims Previous Week 2231K
7/2/2015 Nonfarm Payrolls June 2015 230K
7/2/2015 Nonfarm Private Payrolls June 2015 225K
7/2/2015 Unemployment Rate June 2015 5.40%
7/2/2015 Factory Orders May 2015 0.20%

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

 

This week starts out on Monday with the release of the pending home sales figure for the month of May, which is expected to show a 1.4 percent increase over the April level. On Tuesday another housing release will be released with the Case-Shiller 20-City Home Price index for the month of April, which is expected to show a gain of 5.6 percent on a year over year basis. This release, however, will likely be overshadowed by both the Chicago PMI and the official government consumer confidence figure, both of which are also released on Tuesday. With the Chicago PMI expected to be at 50 exactly (the inflection point between manufacturing expansion and contraction) and given the volatility we have seen in other regional manufacturing data, this release could swing significantly above or below expectations and have a noticeable impact on the financial markets. Consumer confidence is expected to have shown a slight increase in the month of June, but not a large enough increase to really move the market unless the market expectations are widely divergent from what transpires. On Wednesday the overall ISM Index for the month of June is set to be released with expectations of a slight increase up to 53.2 from 52.8. With the rather odd data points that have been releases recently regarding manufacturing, this release really could miss or exceed expectations by a wide margin. Thursday is a very busy day for economic news releases as everything that normally would have been released on Friday is released on Thursday, in addition to what would have already been released on Thursday. Given some of the releases of the day, the standard weekly unemployment related figures are not going to have a noticeable impact on the overall markets on Thursday. The government’s overall unemployment rate and payroll figures are likely to take center stage during the day on Thursday. The payroll figures will be very closely watched as both public and private payrolls are expected to have decreased by about 50,000 during the month, but they are both expected to stay well above the 200,000 level, which is a key level to show strength in the overall employment market. The overall unemployment rate is expected to have decreased from 5.5 percent down to 5.4 percent during the month of June. If this turns out to be the case it seems the Fed will still be on track to increase interest rates at some point during 2015, as discussed above in the national news section. This week wraps up on Thursday with the release of factory orders for the month of May, which are expected to show a very slight increase of 0.2 percent; if this turns out to be the case it would signal that while orders did in fact grow they did so at a very slow pace compared to what they should have been growing at if the US economy was truly in growth mode. In addition to the scheduled economic news releases there is only one Fed speech this week given on Tuesday, which will likely hold no new information that will move the overall market.

 

Fun fact of the week—Greek voting

 

No one in Greece can choose to not vote. Voting is required by law for every citizen who is 18 or older.

 

Source: Dubois, Jill et. al. 2003. Cultures of the World: Greece. New York, NY: Benchmark Books.

 

Have a great week!

 

Peter Johnson

 

For a PDF version of the below commentary please click here Weekly Letter 6-22-2015

Commentary at a glance:

-The US markets continued to trade in the choppy manner we have seen for the past few months.

-Will they reach an agreement or will they not? This is the question surrounding Greece.

-Fed chair Janet Yellen has spoken and did not say much.

-Trade bill may be back on the table in Washington DC as Republicans get behind it.

-Economic news last week, in aggregate, came in at market expectations.

 

Market Wrap-Up: Concerns over the fate of Greece, combined with a Federal Reserve meeting during the middle of the week, provided the main driving force behind what turned out to be a very choppy week for the US financial markets. 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 6-22-15

From a technical perspective, last week we went from looking pretty bad on two of the three major indexes to looking fairly strong on two of the three major indexes last week. The NASDAQ (lower left pane above) remains hands down the strongest of the three major indexes as it managed to break out above the upper bound of its most recent trading range and close out the week above the level. The S&P 500 (upper left pane above) came roaring back technically last week, moving from a very negative breakdown two weeks ago to breaking back over the upper bound of its trading range last week; though it did fall back to earth on Friday, ending the week within its trading range. The Dow (upper right pane above) remained solidly in third place last week, but even it improved from a technical standpoint as the index moved from below to within its latest trading range by the end of the week. In all of the movements we saw last week, time was compressed a little more than normal as rumors and stories continually flew around about Greece striking a deal or the deal remaining very far out of reach. Between now and the end of the month there will likely be even more choppiness in the markets as everything is coming down to the wire with Greece. There is, however, a general lack of fear in the market that the situation will get very far out of hand. The easiest way to see this is to look at the current level of the VIX, which remains under its 52-week average level. While the chopping of the VIX has started over the past week we are still not seeing anything like the volatility one would expect if investors really thought Greece was going to blow out of the Eurozone and start the contagion that so many investors feared a few years ago.

 

International News: International news last week focused on the same old story that seems to have been the main story for the past few years—Greece. Perhaps we are nearing an end game in Greece, as the clock is quickly ticking towards midnight, but we have been in this position numerous times before and each and every time some gimmicks arrive at the last minute to save Greece from default. This time will likely be no different as there are several emergency meetings being held across Europe this week as both sides race to the June 30th deadline for Greece to make a $1.7 billion (1.5 billion euros) debt payment. There had been some hope that the International Monetary Fund (IMF) would extend Greece a grace period if the country doesn’t make the payment on time, but that thought was summarily put to rest last week as IMF Chief Christine Lagarde explicitly said that there will be no grace period for Greece. If no payment has been made by midnight on the 30th, Greece will be considered in arrears on July 1st and technically in default. In coming down to the wire, at this point there is really only one “Very, very last chance to get a political deal on Greece – but it would probably be much too late to get anything disbursed by 30 June given the need to get the parliaments involved,” according to Bank of America. This last chance is a European Summit meeting that will be held on Thursday and Friday of this week. The problem, however, is that any deal would have to be ratified by each of the EU parliaments, a few of which are currently on holiday and would need to be enticed to return to work just to vote on a Greek deal. One other aspect of the situation in Greece that could have a noticeable impact on the global financial markets would be the potential for the country to impose capital controls to stop a run on the banks. Capital controls are a way for the government to limit the amount of money that can be pulled out of a financial institution during a given time period, typically a single day. Over the past few weeks we have been seeing capital leaving the Greek banks at a rate of about a billion euros per week and it has been accelerating slightly. The banks, however, are tapping into emergency funding from the ECB, which is providing the euros so that the banks can give them out. This emergency funding may also be coming to an end as the ECB is looking at its current rules and should it determine to end the lending the banks would immediately have to implement capital controls. At least, barring some obscure rule, this situation will largely be played out early next week and hopefully the global financial markets can focus on something else.

 

Russia may just end up being the something else the market decides to focus on. Russia continues to try to do everything it can to make life difficult for nearly everyone else. Russia may even play into the situation with Greece as the White House, which has stayed largely quiet on the financial situation in Greece, made a statement over the weekend that it would be very troubling if Greece turned to Russia for a financial bailout. This would be a problem for several reasons, not the least would be Russia holding a huge debt over a member of NATO and forming a stronger alliance with an EU member state that already does not like the rest of Europe. Russia, however, would gain a very strategic partner, even if it is a partnership formed in debt. This would be akin to the deal Russia struck with Iran a few weeks ago in which Russia agreed to sell 63 international continental ballistic missiles (ICBMs) to the rogue country. These missiles are easily capable of hitting Israel as well as many other countries in the region and are nothing more than just a small power play in the region with Russia trying to do everything it can to make the west upset. These missiles are likely to be the biggest threat to the current price of oil as any movement, fueling or anything else having to do with the missiles in Iran will likely send the price of oil moving substantially higher due to the risk of Israel preemptively attacking Iran.

 

China had a very interesting week last week seeing the main Chinese index, the Shanghai composite, fall more than 13 percent during the week, the largest weekly drop for the index in the past 7 years. The primary reason for the decline was the government in China continuing to tighten the margin levels the government allows investors to take on when making investments. In addition to margin tightening there were a lot of IPOs last week on the exchange, 25 in total, and there were fears that some of those IPOs may run into liquidity problems since there were so many happening nearly all at once. The biggest decliners for the week were the real estate companies and banking, which signals that this could be the start of a bigger unwinding of an index that is still up more than 100 percent since the middle of August 2014. Much of the driving force behind the global financial markets has been the performance of China, so the market moving lower could present a bit of a problem going forward if the correction does start to accelerate.

 

National News: National news last week focused on Washington DC as the Fed concluded its latest FOMC meeting and presented its rate decision and there was a bit of a revival of the President’s trade bill from unlikely foes on Capitol Hill. On Tuesday and Wednesday last week there was a meeting of the Federal Open Market Committee (FOMC), a subset for the Federal Reserve Bank Presidents. The committee meets on a monthly basis and decides what, if anything, should be changed in the Fed’s interest rate policy. This month, as expected, the Fed left interest rates as they have been for many years, at a range between zero and 0.25 percent. During chair Yellen’s press conference she made it seem like the Fed was still thinking interest rates would be able to start to increase this year, but answers pertaining to the exact timing and amount remain elusive. Despite weakness that has permeated through several areas of the US economy in the past few quarters the fact is that the US economy is growing, even if it’s growing slower than many people would like. Unemployment has been coming down, albeit because of a lack of labor force participation, and wages have even started to tick upward. Inflation remains stubbornly below the Fed’s target of 2 percent, but as chair Yellen acknowledged, that may be the case for an extended period of time. So why the need to increase interest rates? The Fed needs to increase interest rates so it can get a little more breathing room from the very tight spot it find itself in currently—being tied to a range of rates with a lower bound of zero. If the Fed increases rates and in the future something happens to the economy or financial markets that requires Fed action, the Fed would have the ability to lower interest rates. If the rates were already at zero, the Fed would not have the ability to lower them further. So when is the Fed likely to start increasing interest rates? The table to the right shows the latest CME Group’s Fed Watch data in terms of the odds of when an interest rate hike may occur. As you can see the odds favor the end of the year (and even early next year), more than the nearer term meetings. The bond market, however, seems to be pricing in the Fed to start increasing interest rates next year as yields have continued to move lower, which is the opposite of what you would expect if the bond market thought interest rates would be increasing in the near term.  But as chair Yellen kept reiterating, the first rate hike of the Fed will be heavily dependent on the incoming data, which could easily swing either more or less positive. During her question and answer session on Wednesday one member of the media asked Chair Yellen if she is taking into consideration the situation unfolding in Greece or in other parts of the world before taking her next step. In true Fed speak she answered that the US Fed will move when the time is correct for them to make an adjustment. Meanwhile, over on Capitol Hill last week two unlikely foes came together in an attempt to pass the trade bill legislation.

Fed rates 6-22-15

President Obama garnered enough support last week from House of Representative Republicans that they were able to pass the “fast track” trade bill, also known as the trade promotion authority and the trade adjustment assistance bill. The two bills are staunchly opposed by Democrats because they feel the passage of the bills would take work away from Americans as more imports replace items that are made here in the US. The Democrats are also upset that under the fast track deal the President has the right to negotiate trade deals with other countries, trade deals that Congress cannot change in any way. The only thing Congress would be able to do would be to vote “yes” or “no” on a deal presented to them. The bill now moves over to the Senate where it will have a very difficult timing passing with the current language in place. If both bills pass, there could be a small impact on manufacturing in the US as cheaper manufacturing would be available from elsewhere in the world. In the end, the US just does not manufacture all that many items anymore and items that are made here in the US are typically much higher in cost than if they were made abroad. The main groups against these two bills are unions as they feel this will take away their ability to ensure the quality of products as they say US workers care much more about their craftsmanship than many workers outside of the US.

 

Market Statistics: All three of the major US indexes moved higher over the course of the previous week with much of the movement seen during the middle three days of trading. Volume overall was above average, which was not surprising given the Fed statement on Wednesday and the continued uncertainty over the situation unfolding in Greece:

 

Index Change Volume
NASDAQ 1.30% Above Average
S&P 500 0.76% Above Average
Dow 0.65% Above Average

 

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 3.73% Oil & Gas Exploration -1.23%
Healthcare Providers 3.34% Natural Resources -0.96%
Healthcare 2.21% Broker Dealers -0.78%
Residential Real Estate 2.15% Energy -0.71%
Medical Devices 1.88% Regional Banks -0.70%

With the NASDAQ being the top performing index of the three major indexes it was not surprising to see that Biotechnology took the top spot on the best performing sectors list. Biotechnology typically trades in the same direction and often with higher magnitude than the NASDAQ as many of the companies in the Biotechnology sector are NASDAQ listed companies. Healthcare in general had a very strong week last week as Healthcare Providers and Medical Devices also made the top 5 list. When looking at the bottom 5 performing sectors of the markets, Oil & Gas Exploration had a rough week last week despite the price of oil remaining relatively flat. Two financial related sectors made the bottom 5 last week, those being Broker Dealers and Regional Banks as the Fed kept interest rates in place for at least a few more meetings.

The US fixed income market made it two weeks in a row of gains as uncertainty over the situation in Greece continues to intensify:

Fixed Income Change
Long (20+ years) 0.96%
Middle (7-10 years) 1.14%
Short (less than 1 year) 0.00%
TIPS 1.02%

The US dollar made it three down weeks in a row last week, falling by 0.84 percent against a basket of international currencies as investors seemed to like almost any currency other than the US dollar last week. The US dollar has now fallen by more than 3 percent over the course of the past three weeks. The British Pound was the best performing of the major global currencies for the second week in a row, gaining 2.08 percent against the value of the US dollar as the pound is looking like a safe haven asset for Europe in light of the mess that is going on with the Euro and a potential second currency being run in Greece. The British Pound has gained almost four percent over the course of just the past two weeks. The weakest performing currency of the major global currencies, aside from the US dollar, was the Australian dollar, which gained 0.31 percent against the value of the US dollar.

Last week was an interesting week for commodities as the precious metals rallied, while soft commodities struggled:

Metals Change Commodities Change
Gold 1.67% Oil 0.02%
Silver 1.11% Livestock -1.87%
Copper -0.46% Grains 0.33%
Agriculture -0.55%

The overall Goldman Sachs Commodity Index turned in a loss of 1.52 percent last week despite oil remaining relatively flat for the week. Oil gained 0.02 percent last week as the focus of the world seemed to be on Europe more so than the Middle East. As we get closer and closer to the end of the month, the potential Iranian nuclear deal may play a larger role in the price movements of oil. If it looks like a deal will be struck then oil may move lower, but if a deal does not look like it will happen we could see the price of oil move up as there is more uncertainty over what Iran will try to do next.

Metals were mixed last week with Gold gaining 1.67 percent, while Silver increased 1.11 percent and Copper declined by 0.46 percent. Soft commodities were very mixed last week with Livestock falling for the second week in a row giving up 1.87 percent, while Grains advanced 0.55 percent and Agriculture overall declined by 0.55 percent.

On the international front, the main index in India turned in the top performance last week as the Bombay based Se SENSEX Index gained 3.37 percent as the country continues to ride on the enthusiasm of Prime Minster Modi. He is attempting to grow the local economy within India while at the same time making India competitive on a global scale. On the flip side, the worst performing index of the major global financial indexes last week was found in China—it is about time! The Shanghai based Se Composite Index fell 13.32 percent over the course of the previous week, which for most markets in the world would be a very large event, but for the Chinese index it only erased less than the last four weeks of gains. The index is also still up more than 100 percent since August of 2014. However, with such a sharp correction having taken place, many investors will be watching very closely over the coming days and weeks to see if the rally of the past nine months has come to an end or if this little blip is just a buying opportunity.

Last week the VIX moved around a significant amount, but ended the week relatively close to where it started, gaining only 1.31 percent. The VIX seemed to really be trading on the news coming out of Greece, as it has been doing more and more over the past few weeks. This phenomena is likely to become more intense over the coming days as we are approaching the end date for Greece to come up with the funds to make its month end payment to the IMF. The VIX remains in the lower end of the range we have seen so far this year, but it has spiked up twice in the past month, showing that there is still a little life in the VIX. At the current level of 13.96, the VIX is implying a move of 4.03 percent over the course of the next 30 days. As always, the direction of the move is unknown.

For the trading week ending on 6/19/2015, returns in FSI’s hypothetical models* (net of a 1% annual management fee) were as follows:

  Last Week Year to Date
Aggressive Model 1.23 % 1.20 %
Aggressive Benchmark 0.17 % 3.27 %
Growth Model 0.95 % 0.21 %
Growth Benchmark 0.13  % 2.61 %
Moderate Model 0.64 % -0.47 %
Moderate Benchmark 0.10 % 1.91 %
Income Model 0.50 % -0.71 %
Income Benchmark 0.06 % 1.03 %

*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.

 

I made only two small changes to the model this week and they were both to add to areas of the markets that have been performing well during the recent market volatility. The first change was to add a second step into my Schwab Mid Cap ETF (ticker SCHM). The second was to add an initial position in the Schwab Small Cap ETF (ticker SCHA). Both mid and small cap stocks have been performing well when looking at a risk adjusted return over the past few months, a trend that looks like it could be sustained in the future. I used some of the cash that had been building up in the models to fund the purchases and still have a healthy amount of cash left in the models to make further purchases if opportunities present themselves.

 

Economic News:  Last week the focus of the economic news releases was the health of the US economy overall. 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). The interesting thing is that both of them were manufacturing related:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Negative 6/15/2015 Empire Manufacturing June 2015 -2 6
Neutral 6/15/2015 NAHB Housing Market Index June 2015 59 56
Slightly Negative 6/16/2015 Housing Starts May 2015 1036K 1100K
Slightly Positive 6/16/2015 Building Permits May 2015 1275K 1100K
Neutral 6/17/2015 FOMC Rate Decision June 2015 0.25% 0.25%
Neutral 6/18/2015 Initial Claims Previous Week 267K 276K
Neutral 6/18/2015 Continuing Claims Previous Week 2222K 2270K
Neutral 6/18/2015 CPI May 2015 0.40% 0.50%
Neutral 6/18/2015 Core CPI May 2015 0.10% 0.20%
Positive 6/18/2015 Philadelphia Fed June 2015 15.2 8

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

 

Last week started out on Monday with a real downer of an economic news releases as the Empire Manufacturing index for the month of June was released and showed a significant decline in manufacturing activity in the greater New York area. Expectations had been for a reading of 6 after a reading of 3.1 back in May, but this was not to be the case as the index printed a -2 reading. This was the second decline seen in manufacturing in the past three months in New York and as far as I can tell they cannot blame the weather this time around. On Tuesday we received some mixed information about the US housing market as the housing starts figure came in slightly below expectations, while the building permits figure came in slightly above expectations. Starts are typically more important than permits, but the market seemed to like that both figures stayed over 1 million units during May. On Wednesday the announcement that Wall Street seemed to be waiting for during the first part of the week was released, that being the Fed FOMC rate decision and press conference of Chair Yellen. As mentioned above, the Fed decided to leave interest rates unchanged at this meeting while still signaling that they expect to increase rates at some point during 2015, but the timing and amount of the increase or increases remain uncertain. This lack of action on interest rates caused a muted rally in the US bond market, but other than that there was little market reaction. On Thursday the standard weekly unemployment figures were released with both figures coming in very close to market expectations and were therefore largely ignored by the markets. Later during the day on Thursday the Consumer Price Index (CPI) for the month of May indicated that prices at the consumer level increased at an annual rate of only 0.4 percent during the month of May, well below the Fed’s target rate of 2 percent. Core CPI was even worse, gaining only 0.1 percent. Core CPI is a measure of inflation that takes out volatile assets such a food, fuel and energy to arrive at a more true inflation rate. Last week wrapped up on Thursday with a strange economic news release, that being the Philadelphia Fed Index of manufacturing activity in the greater Philadelphia area. Typically this index goes in the same direction as the Empire index, but this time it thankfully did not. Markets had expected the index to turn in a reading of 8, but instead the index posted a 15.2, the strongest reading in the past 6 months. It is unclear why there was such a wide deviation in performance between the two indexes, but one thing is very clear: manufacturing activity is much stronger in Philly than in New York.

 

This is a standard week for economic news releases as far as the number of releases, but the big release of the week will be on Wednesday with the final revision for the dismal first quarter 2015 GDP number. The releases highlighted below have the potential to move the overall markets on the day they are released:

 

Date Release Release Range Market Expectation
6/22/2015 Existing Home Sales May 2015 5.26M
6/23/2015 Durable Orders May 2015 -0.50%
6/23/2015 Durable Goods -ex transportation May 2015 0.60%
6/23/2015 New Home Sales May 2015 525K
6/24/2015 GDP – Third Estimate Q1 2015 -0.20%
6/25/2015 Initial Claims Previous Week 271K
6/25/2015 Continuing Claims Previous Week 2210K
6/25/2015 Personal Income May 2015 0.50%
6/25/2015 Personal Spending May 2015 0.70%
6/26/2015 University of Michigan Consumer Sentiment – Final June 2015 94.8

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

 

This week the economic news releases start on Monday with the release of the existing home sales figure for the month of May. If last week’s housing figures are any indication, this release should come in very close to expectations. Tuesday’s durable goods orders will be very closely watched as the expectations are for a slight decline in overall orders thanks to slow sales of airplanes and automobiles. However, when transportation is taken out of the equation, durable goods orders are expected to have increased slightly during the month. The fourth and final US housing data point for the month of May is also set to be released on Tuesday with the new home sales figure, which is expected to clear 500,000 units. On Wednesday the most watched release of the week is set to be released, that being the final revision for the first quarter GDP figure for the US economy. You may remember that the first estimate came in at 0.2 percent, while the markets had been expecting 1 percent. Then the second revision painted a much different picture, coming in at -0.7 percent. Now the third and final revision is expected to show a little recovery, coming in at -0.2 percent. If this release misses expectations to the low side we could see the markets move lower, but the Fed would then come into play. If the print is -0.7 or worse it seems the market may kick expectations of the Fed raising rates into next year on the thought that the economy is too weak to raise them this year. If this scenario played out the markets may move higher thanks to the Fed punch bowl being left out a little longer. On Thursday the standard weekly unemployment claims are set to be released with expectations of very little change over last week. Also released on Thursday is the personal income and spending figures for the month of May, which are both expected to be higher than they were in April. Personal spending is more important to the economy and income so look for the markets to react more on the spending side than the income side. This week wraps up on Friday with the release of the University of Michigan’s Consumer Sentiment Index for the month of June (final estimate) with expectations of no change over the mid-month release. All of these above mentioned releases except for the few highlighted releases will likely play second fiddle to the happenings in Europe this week as the deal watch between Greece and its creditors will take center stage throughout the week.

 

Fun fact of the week—Donald Trump is at it again!

 

Last week Donald Trump launched his official Presidential campaign for 2016, in a speech that was nothing short of bizarre, both in topics as well as format. This is not Trump’s first foray into Presidential politics; he has made comments about running for President five other times in the past. In successive order Donald Trump has made quasi Presidential announcements in 1987, 2000, 2004, 2008, and 2012. However, each time has been more for show than anything else and each of the past times he has not explicitly said that he is running for President. When asked by Bloomberg what he estimated his odds of winning the Presidency in 2016 are, Mr. Trump gleefully said between 10 and 20 percent—at least he is optimistic. Forget just getting the Republican nomination; he wants to go all of the way to the White House!

 

Source: http://www.mashable.com

For a PDF version of the below commentary please click here Weekly Letter 6-15-2015

Commentary at a glance:

-The US markets were very choppy last week with two indexes briefly breaking down technically.

-Greece remains locked in a financial conflict with its creditors with both sides refusing to give in.

-Wednesday could be the first interest rate hike by the Federal Reserve!

-No trade bill for President Obama as Democrats revolt.

-Economic news last week came in slightly above market expectations.

 

Market Wrap-Up: The markets experienced a bit of a wild ride last week as stories about a potential deal in Greece circulated only to be shot down by the creditors several times during the week, each time causing the global financial markets to either move much higher or lower. 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 6-15-15

From a technical standpoint there were a few important changes last week with the most important being that both the S&P 500 (upper left pane above) and the Dow (upper right pane above) broke down, breaking through the lower end of their respective trading ranges. While they both only stayed down for a very brief period of time (two days) they technically broke down and stayed down before jumping higher on Wednesday on hopes of a deal in Greece. The unofficial deadline for a deal to be struck was June 14th, as any deal would need time to be ratified by all of the national parliaments that need to sign off on the deal prior to the end of the month when payments are due from Greece. Throughout the week we witnessed a bit of a wild ride on the VIX as the index briefly moved above the 52-week average level at the same time the breakdown occurred on both the S&P 500 and the Dow, only to end the week well below the 52-week average level. The NASDAQ (lower left pane above) meanwhile faltered a little, but still remains technically very strong in terms of its most recent trading range. Going forward over the next two weeks we could see some very large gyrations in the global financial markets as the deadline for Greece, a deadline that cannot easily be pushed out further, approaches. It would be easiest for Europe to let Greece deal with the fall out after the fact, but the easiest answer is not necessarily the best in this situation.

 

International News: International news focused last week on two main stories, but they both pertained to Greece. The G7 meeting was held in Germany over Sunday and Monday last week and the main topic of the meeting was Greece and the possibility of it staying within the Eurozone. Greece has been the topic of numerous meetings held all around the world over the past four years, but the topic remains one that is very heated with very different views from different parts of the world. At the conclusion of the meeting, there was nothing concrete that the G7 pledged to do about Greece and the negotiations between Greece and its creditors continued throughout the weekend, ultimately ending in nothing being done, much like the past. The other aspect of the G7 meeting that received a lot of media coverage was the discussion between US President Obama and the Iraqi Prime Minister Haider al-Abadi after a failed attempt of the two talking when President Obama unknowingly gave the prime minster the cold shoulder. The main topic of the meeting between the two was ISIS and what could be done to combat ISIS’s advancement in Iraq. Ultimately, the President announced that he would be sending more military advisers to the country to help the Iraqi army in their efforts to stop ISIS. While world leaders were meeting in Germany, financial leaders from around Europe were holding various meetings and phone calls, trying to come up with a plan for Greece.

 

At this point Greece does not seem to have a plan if its international lenders do not release funds to it before the end of the month. We would have been seeing the same deadline-pushing and last minute deals several times this month if Greece had not pulled its tactical sleight of hand two weeks ago, deciding to bundle all of its June payments into one payment at the end of the month. Negotiations since that time have been tenuous at best, but at least both sides are still talking. Greece wants and needs more money and time; the creditors do not want to give the country more of either. The creditors want concrete changes to the fiscal system in Greece as well as changes to items such as pension payouts, retirement age and budget deficits. Greece wants to make as few changes as possible and certainly none of the changes that will potentially have a material impact on the everyday lives of Greek citizens. Each side accuses the other of trying to bully them into signing an agreement, leaving both sides just as wide apart if not wider apart than they were just a few short weeks ago. At this point there is enough talk about Greece taking actions, such as running a parallel currency and how it would implement capital controls, that it seems many investors and creditors alike are thinking–if not outwardly saying–that a default is likely in the coming weeks. For the financial markets this leads to uncertainty and uncertainty is not something the markets enjoy. Greece does not matter in the grand scheme of the global financial markets; its economy is just too small and the country has very little that any other country in the world would like. The problem is that Greece has a lot of debt and that debt is not owned within Greece, but rather outside of Greece at financial institutions such as the World Bank and the International Monetary fund (IMF). In total there are about 350 billion euros in outstanding debt that Greece owes, of which about 250 billion is held by the ECB, IMF and World Bank. So why all of the concern if it is just major multinational financial institutions that own the debts? There remains a fear of contagion within Southern Europe if Greece gets the boot from the Eurozone and the Euro. The chart to the right from Bloomberg is of the Spanish 10-year bond yield and as you can see it has more than doubled in less than three months as the negotiations between Greece and Europe have turned sour. We have also seen the same types and magnitudes of spikes on other debts such as the bonds of Italy and Portugal. Europe can easily afford to deal with Greece in terms of either bailing the country out or letting the country default and go its own way. However, Europe cannot afford to have other much larger economics such as Spain and Italy run into serious financial trouble.Spanish Yield

 

National News: National news last week was interesting to say the least with politicians once again making headlines. This time around the discussion and vote revolved around the Trans-Pacific Partnership (TPP) trade deal, which has been considered the hallmark of President Obama’s foreign trade policy and potentially the largest international trade deal in US history. The TPP would have done numerous things as there were many riders to the actual bill, but one of the key pieces of the legislation was the ability for the sitting President to fast track trade bills between the US and other countries. These bills would eventually be sent to the US House of Representatives for approval, but they could not be changed by the House; it would have been a thumbs up or down vote. This key provision of the deal is what really turned the Democratic Party against the bill, which ended up dying in a procedural vote as both Democrats and Republicans alike voted the measure down. Even former Speaker of the House Nancy Pelosi opposed the bill, arguing that Americans would rather have bills aimed at creating jobs than at creating trade assistance. While there are probably some rules written in the history books that could allow for the TPP to come back to life and potentially pass, it will not be doing so without a healthy dose of criticism from both sides of the aisle. This latest defeat for the White House really shows how much of a lame duck President Obama has become because he even went to the hill on Friday to garner support for the TPP; in the end it proved useless. From a financial markets standpoint this agreement being defeated helped the US economy in the short term, while potentially hurting many countries in the Asian region. The Federal Reserve also made a few headlines last week as we come up to a key Fed meeting being held this week in Washington DC.

 

This week is the Federal Reserve’s Open Market Committee meeting (FOMC). This is the two day meeting the Fed uses to discuss and set any policy changes it sees fit in trying to fulfill its dual mandate of price stability and full employment. In short, this is the meeting where the Fed would announce an increase in interest rates if there will be one this month. The chance of an increase in the interest rate at this meeting remains very miniscule, but there is a chance that the Fed surprises the market and goes for it. The economic data is not really strong enough to justify it, but the Fed likes to look at trends in determining the appropriate time to start increasing interest rates. The meeting starts on Tuesday of this week and runs through Wednesday with an announcement by the Fed scheduled at the conclusion of the session on Wednesday, along with Fed Chair Yellen’s standard press conference followed by Q&A. Going into 2015, June was the odds on bet as the month the Fed would start to raise interest rates, but as 2015 has progressed the date the market expects has been steadily pushed back with the markets now pricing in a 45 percent chance of a rate hike in October and a 65 percent chance of a rate hike in December, according to the latest figures produced by the CME Group and current as of 6/12/15. If the Fed were to surprise the markets and increase interest rates at this meeting we would see a potentially very large dislocation in the financial markets as investors adjust their positions much faster than they would have liked to the new higher interest rate environment.

 

Market Statistics: The three major US indexes were mixed last week as investors waited for news about both Greece and the potential US Fed interest rate hike, which could come as early as this week. Volume was about average when looking at all three indexes in aggregate, but the NASDAQ saw slightly lower volume than is typical:

 

Index Change Volume
Dow 0.28% Average
S&P 500 0.06% Average
NASDAQ -0.34% Below Average

 

Unlike the past few weeks when the NASDAQ has been the high flying index of the three, last week seemed to be much more of a risk off trading week as investors moved back into areas of the markets that had recently been subjected to undue selling. Areas such as consumer staples, utilities and other boring sectors performed relatively well compared to the performance we had been seeing over the past few weeks.

 

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
Insurance 2.03% Semiconductors -1.65%
Regional Banks 1.94% Transportation -1.12%
Financial Services 1.30% Pharmaceuticals -0.97%
Financials 1.16% Biotechnology -0.86%
Consumer Goods 1.07% Natural Resources -0.85%

Financial related sectors took four out of the five top performing spots last week as investors seemed to be willing to take on the financial risks that could come out of a disorderly solution to Greece and the potential for a rising interest rate environment here in the US. On the negative side, a few of the best performing sectors so far this year made the bottom five sectors of the week, those being Semiconductors, Pharmaceuticals and Biotechnology. These sectors moving lower was likely due to investors pulling some profits out of very profitable trades as the markets struggle for direction and form what is looking more and more like a market top. Even after the decline seen last week Biotechnology is still up almost 20 percent for the year, while Pharmaceuticals are not far behind, having gained nearly 16 percent so far during 2015.

The US fixed income market experienced what is commonly referred to as a dead cat bounce last week after suffering one of their worst weeks in several years two weeks ago:

Fixed Income Change
Long (20+ years) 0.30%
Middle (7-10 years) 0.16%
Short (less than 1 year) 0.01%
TIPS 0.10%

The US dollar made it two down weeks in a row last week, falling by 1.62 percent against a basket of international currencies as investors seemed to cheer on any news stories out of Greece and Europe, even if they turned out to be completely false. The British Pound was the best performing of the major global currencies, gaining 1.86 percent against the value of the US dollar as it now looks like a referendum vote will be held within the country sometime during the next two years. The weakest performing currency of the major global currencies was the Canadian dollar, which gained 1.06 percent against the value of the US dollar.

Both oil and gold bucked the trend last week among commodities, which were predominantly moving lower:

Metals Change Commodities Change
Gold 0.88% Oil 1.40%
Silver -0.91% Livestock -2.33%
Copper -0.62% Grains -2.22%
Agriculture -1.26%

The overall Goldman Sachs Commodity Index turned in a gain of 0.77 percent last week with all of the gains coming from the upward move in the price of oil. There was no clear reason as to why oil moved higher last week, but it does seem oil has finally found a trading range it may stay within for a few months. The chart to the right shows the trading range (blue horizontal lines) that oil (green line) has been trading within over approximately the last two months. The range represented is oil moving between approximately $57.50 on the low end up to $61.50 on the high end. As mentioned last week, one geopolitical event that could really move the price of oil lower would be the sanction coming off of Iran in consideration of its roughly 1 million barrels a day of oil hitting the open oil market. If all of Iran’s oil did flood on to the market we would likely see oil prices dip below $55 per barrel, at least for a brief period of time. This could potentially lead to a buying opportunity for the oil and gas stocks, which have declined in some cases drastically over the past year.oil 6-13-15

Metals were mixed last week with Gold gaining 0.88 percent, while Silver fell 0.91 percent and Copper declined by 0.62 percent. Soft commodities all moved lower last week with Livestock falling 2.33 percent, while Grains declined 2.22 percent and Agriculture overall declined by 1.26 percent.

On the international front, the main Chinese market continued to plow ahead as the Shanghai based Se Composite Index gained 2.85 percent over the course of the previous week, giving the index a two week gain of more than 12 percent. On the flip side, the worst performing index of the major global financial indexes last week was found just to our north, with the Canada based Toronto Stock Exchange declining by 1.44 percent over the course of the week.

Last week the VIX started out the week by moving above the 52-week average level of the VIX, but this move was short lived as the index moved sharply lower over the following three days and ended the week well below the 52-week average level. So while the overall weekly change of the VIX declining by 3.03 percent may not seem all that exciting, it was more about how the index got to that weekly change figure that caught some investors’ attention. Last week saw some of the sharpest moves we have seen in the VIX with the driving force behind the moves seeming to be news out of Greece and Europe about Greece. As mentioned above in the International section of this commentary, Greece is still a long way away from the drop dead date at the end of the month, at which time a full payment will be due, but it seems the markets are now starting to look seriously at the possibility that Greece may not make the needed payment. At the current level of 13.78 the VIX is implying a move of 3.98 percent over the course of the next 30 days. As always, the direction of the move is unknown.

For the trading week ending on 6/12/2015, returns in FSI’s hypothetical models* (net of a 1% annual management fee) were as follows:

  Last Week Year to Date
Aggressive Model 0.17 % -0.05 %
Aggressive Benchmark 0.42 % 3.10 %
Growth Model 0.07 % -0.76 %
Growth Benchmark 0.33  % 2.47 %
Moderate Model -0.04 % -1.13 %
Moderate Benchmark 0.24 % 1.82 %
Income Model -0.09 % -1.22 %
Income Benchmark 0.12 % 0.97 %

*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, all of which were defensive in nature as the markets really look like they have formed a top and could move lower in the near term. Our first major change was to sell two of our individual utility stocks that we had owned for many years in most cases. We sold both Consolidated Edison (ticker ED) and Wisconsin Energy (ticker WEC). These two companies were sold not so much for individual behavior, but for the fact that as interest rates start to increase here in the US, Utilities are one of the most at risk sectors of the market as it is a high dividend paying sector that many investors have been hiding out in as proxy for interest bearing fixed income, which is currently paying very little. As rates increase, we could continue to see utilities take large losses as investors adjust their positions. The proceeds that were generated from the sales of both utilities stocks went into cash.

 

On the more tactical side of our models we made several changes as well, with the first being the selling of the international hedged equity fund (ticker IHDG). The hedged international equity run looks like it has come to a conclusion as the risks of the international investment space are seemingly outweighing the potential benefits. Add in the large move in the US dollar over the past 6 months, which has now begun to fade, and the two main driving factors behind us investing in the fund have started to break down. Over the course of the week we also sold our positions in the forward select income fund (ticker KIFAX) after we had held the position for more than 8 months in some cases. This fund also seems to be falling prey to a rising interest rate environment much more than would have been expected when looking back at the historical relationship between real estate and rising interest rates. While the dividend payments of the fund have proven very beneficial, the risks going forward for the fund currently seem to outweigh the rewards. This is likely a fund that we will use in the future as it is managed very well and performs well in many different market environments. The final change of the week last week was initiating a hedging position to offset part of any future stumbles we may see with our baskets of stocks. We did this by purchasing Direxion funds inverse S&P 500 fund (ticker DXSSX), which provides us with the inverse movement of the S&P 500 times two. This is a precautionary step that was taken after looking at how our stock baskets have been performing over the past few weeks and the trend which seems to have started to take hold. In total, we currently have an over weighting to cash and have mitigated some of the risk in our remaining holdings, we continue to look for investment opportunities, but are finding very few investments that would be considered value investments because of their very lofty current valuations and prices.

 

Economic News:  Last week the focus of the economic news releases was on the US consumer. There were no releases that missed market expectations by a significant amount and only one release that significantly beat market expectations to the upside (highlighted in green below):

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Neutral 6/11/2015 Initial Claims Previous Week 279K 278K
Neutral 6/11/2015 Continuing Claims Previous Week 2265K 2200K
Neutral 6/11/2015 Retail Sales May 2015 1.20% 1.10%
Slightly Positive 6/11/2015 Retail Sales ex-auto May 2015 1.00% 0.70%
Neutral 6/12/2015 PPI May 2015 0.50% 0.50%
Neutral 6/12/2015 Core PPI May 2015 0.10% 0.10%
Positive 6/12/2015 University of Michigan Consumer Sentiment Index June 2015 94.6 91.5

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

 

Last week the economic news releases started late in the week on Thursday with the release of the standard weekly unemployment related releases with both initial jobless claims and continuing jobless claims coming in very close to market expectations, showing very little change over the past week. The markets on Thursday, however, were primarily focused on the retail sales figures on Thursday as overall retail sales for the month of May came in at 1.2 percent and retail sales excluding auto sales came in at 1 percent growth during the month. Both of these figures beat expectations, but the surprising one was the sales figure excluding auto sales. It remains a bit curious that we are not seeing a pickup in personal spending and yet retail sales have increased. The main way this could happen is that businesses have started to increase their spending after hording cash for many months over the past year. On Friday the Producer Price Index (PPI) for the month of May was released and both overall PPI and core PPI came in exactly at market expectations. With the price inflation running so low at the producer level it seems inflation really remains in check in the US economy, something that is likely to make the Fed’s decision about when to increase interest rates all the more difficult. Wrapping up the week on Friday last week was the release of the University of Michigan’s Consumer Sentiment Index for the month of June (second estimate), which came in higher than expected. Expectations had been for a reading of 91.5 after ending May at 90.7, but instead it printed a 94.6 reading, the fifth highest reading we have seen on the index going back to before the great recession of 2008. Hopefully we will see this positive sentiment transfer into increased spending over the coming months. This would be very positive for the overall health of the US economy if it were to come to fruition.

 

This is a standard week for economic news releases as far as the number of releases, but the big release of the week will be on Wednesday with the Fed rate decision. The releases highlighted below have the potential to move the overall markets on the day they are released:

 

Date Release Release Range Market Expectation
6/15/2015 Empire Manufacturing June 2015 6
6/15/2015 NAHB Housing Market Index June 2015 56
6/16/2015 Housing Starts May 2015 1100K
6/16/2015 Building Permits May 2015 1100K
6/17/2015 FOMC Rate Decision June 2015 0.25%
6/18/2015 Initial Claims Previous Week 276K
6/18/2015 Continuing Claims Previous Week 2270K
6/18/2015 CPI May 2015 0.50%
6/18/2015 Core CPI May 2015 0.20%
6/18/2015 Philadelphia Fed June 2015 8

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

 

This week starts out on Monday with the release of the Empire Manufacturing Index for the month of June, which is expected to show a reading of 6. Remember, the zero line is the inflection point on this index, meaning anything below zero means manufacturing contracted during the month and anything above zero means manufacturing expanded. A reading of 6 is a middle of the road reading, but this release will be closely watched since the past several months the actual release has missed expectations by a wide margin. If the print comes out negative, I think the Fed would have a very hard time justifying raising interest rates any time soon. Also released on Monday is the latest housing market index, which is expected to show a relatively strong reading at 56 as we are now fully into the home buying season across much of the US. On Tuesday more housing related releases are released with both the housing starts and building permits figures for the month of May being released. Both figures are expected to show a reading of 1.1 million units, which would be seen as positive for the overall US housing market. On Wednesday, what could potentially be the largest release of the year is set to be released—the FOMC interest rate decision as discussed above in the national news section. While it is highly unlikely that the Fed will actually increase interest rates at this meeting, it is not impossible and so the markets will be somewhat jittery leading up to this release this week. On Thursday the standard weekly unemployment related figures are set to be released with very little change expected over the previous week’s figures. Also released on Thursday is the Consumer Price Index (CPI) for the month of May and much like the PPI released last week, expectations are for both CPI and core CPI to show readings that are indicative of very low inflation rates currently in the US economy, inflation rates the Fed has said it would like to see up near 2 percent. Wrapping up the week this week on Thursday is the release of the Philadelphia Fed Manufacturing Index, which is expected to show a reading of 8, which is in line with what we have been seeing over the past 5 months, but much lower than the figures we were seeing this same time last year.  In addition to the scheduled releases there are also three Fed officials giving speeches throughout the week, but two of them will be overshadowed by Fed Chair Yellen as she gives her reasoning at a press conference after the rate decision announcement and takes questions for the better part of an hour from the media, as she does after all rate decision announcements.

 

Fun fact of the week—Greece has been here before.

 

Greece has defaulted on its external sovereign debt obligations at least five previous times in the modern era (1826, 1843, 1860, 1894 and 1932). The first episode occurred in the early days of that country’s war of independence and the last default was during the Great Depression in the early 1930s. The combined length of period under which Greece was in default during the modern era totaled 90 years, or approximately 50% of the total period the country has been independent.

Source: www.investopedia.com and “This time is Different” Carmen Reinhart and Kenneth Rogoff

 

Have a great week!

For a PDF version of the below commentary please click here Weekly Letter 6-8-2015

Commentary at a glance:

-The US markets were down last week as they continued to remain range bound.

-The IMF took a shot at the US Federal Reserve this week in a rare comment.

-Greece has finally missed a payment, but at least it is reading the rule book!

-Economic news last week came in slightly above market expectations.

 

Market Wrap-Up: As we are now officially into June and the “summer trading season” for investors, the markets are likely to remain range bound, as they did last week, as there are very few catalysts likely to push them meaningfully higher or lower. 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 6-8-15

As you can see above there are now very noticeable differences in technical strength between the three major indexes in the US. The NASDAQ (lower left pane above) remains very strong with the index only just barely below the upper bound of its most recent trading range and the index did not experience much of a breakdown last week. The S&P 500 (upper left pane above) is solidly in second place in terms of technical strength, but it is much weaker this week than it was last week as it has broken down below the half way level of its most recent trading range. The Dow (upper right pane above) is starting to be very worrisome as it is now just slightly above the lower bound of its most recent trading range and is clearly the weakest of the major indexes. This is troubling for a couple of reasons. First, many investors invest in Dow component companies for the dividends and cannot afford to give up a lot of their total return by having their capital lowered by lower prices. Second, the Dow typically does best in a risk off environment, since it is the most stable of the three major indexes.

 

If people are selling the Dow and pushing it lower, it means they are either moving into cash or moving into more risky investments. With the riskier investments such as the S&P 500 and the NASDAQ also moving lower, it leads me to think they are moving into cash with the proceeds that are coming out of selling the Dow. Throwing in the towel and saying “enough already” for the markets is a sign that we could be in for much more volatility in the near future as investors choose more and more cash instead of sticking with investments. Some of this cash movement is warranted; we are long overdue for a 10 percent plus correction in the markets as it has been more than three and a half years since we have had one. On average, historically, we see a 10 percent correction once each year. We are also well into the sixth year of the current bull market, a market that has seen some of the major indexes increase by more than 200 percent. If trouble is on the horizon it certainly is not showing up in the VIX (lower right pane above) as the VIX remains relatively low given the potential for a correction of meaningful size. Last week, however, we saw the VIX temporarily break above the 52-week average level, a sign that there might yet be some life left in the VIX.

 

National News: Last week was a pretty tame week for national news. We saw a few more Presidential candidates jump into the election race on both sides of the aisle and earnings season for the first quarter of 2015 officially draw to a close. Starting on the Presidential race, we now officially have four candidates running on the Democratic side and ten running on the Republican side. Hillary Clinton remains the odds on favorite for winning the election, but she is starting to take some interesting heat about her voting record from within her own party as well as some questionable actions taken involving money to her family foundation while she was acting Secretary of State for President Obama. It is a bit crazier on the Republican side as there are now so many candidates running that there are bound to be fractions within the party and a lot of in-fighting between now and the primaries, and we have not even officially heard from Jeb Bush yet. Everyone is thinking Bush will run and that the press conference he has scheduled for June 15th will be his formal entrance into the race. The real wild card in the Republican field is a name that almost everyone loves to hate: Donald Trump. He is once again out trying to get his name in the news as he has scheduled an announcement for June 16th, the day after Jeb Bush’s potential announcement. As we move into the summer and the financial markets search for direction we will likely start to hear more and more about the upcoming Presidential election. It sure will be fun!

 

With the first quarter earnings season officially drawing to a close last week it only seems right that retailers were the focus of the earnings releases last week, as retailers really do drive a very large portion of the overall US economy. 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:

 

Conns 5% Hooker Furniture 23% Medtronic 5%
Diamond Foods 44% IDT pushed Michaels Companies -3%
Dollar General 2% J M Smucker -1% Sears pushed
GUESS? 180% Joy Global 7% Zoe’s Kitchen 250%

 

Last week we saw the same out performance of the higher end retailers when compared to the lower end retailers that we had been seeing over the past few weeks. Last week Hooker Furniture and GUESS turned in much better than expected numbers, while lower end retailers such as Dollar General and Conns turned in much lower performance figures.

 

According to Factset Research, we are now done with the first quarter 2015 earnings reporting season. The final numbers for the quarter are 71 percent of S&P 500 component companies having met or beat earnings estimates, while 29 percent fell short. When looking at revenue, 45 percent of the companies beat estimates, while 55 percent fell short. When looking at the historical data, the percentage of companies that have beaten revenue estimates is 58 percent over the last five years, so this quarter’s 45 percent is significantly below the five-year average. Forward guidance for the second quarter of 2015 was unchanged last week with 75 companies, according to Factset, having issued negative guidance, while 28 companies have issued positive forward guidance for the next quarter.

 

International News: International news last week focused on Greece and the IMF for two very different reasons. First, Greece did not make its scheduled 300 million Euro payment to the IMF on the 5th of June as it was supposed to. Instead, Greece dug way into the rule book from the IMF and found that it could request to bundle all of one month’s payments into a single payment at the end of the month. In doing so, Greece will now have a little longer to secure funding to repay the IMF, while not technically falling into default. Rather than trying to obtain 300 million euros for the first payment, Greece will need to try to come to an agreement with creditors to secure 1.6 billion euros in funds by the end of the month to make its payment. This is commonly known as a bullet loan in the real estate industry in which you make no payments at all for a period of time and then everything comes due in one payment of all principal and interest. After making this sleight of hand and bundling the payments, something that has only been done one other time in the history of the IMF by the African country of Zambia, the Greek Prime minister announced that there was no way Greece would subject itself to the demands being outlaid in the creditors’ final proposal. The big sticking points between the two sides are apparently the pension program reforms and the government budget deficit Greece insists it must continue running. This whole drawn out stage show would really be a comedy if it were not for the millions of lives it could end up adversely effecting. The clock is once again counting down and from reports out of Greece, a deal is within sight. All the Europeans have to do to reach the deal the Greeks see is to do everything Greece is asking for, i.e. give Greece cash with no strings attached, walk away and come back the next month to do the same. The Europeans are really starting to get fed up with the whole situation with Greece as they are really starting to look like they are throwing good money into a fire. The proposal I saw online that the IMF and other creditors laid before Greece was not outrageous; it included common sense reforms that any country that is on welfare and out of funds would have to undertake. There is a way for Greece to come out of this okay, but it does involve playing by the same rules as everyone else with no special treatment from the rest of Europe. This type of negotiation and posturing will come to an end in relatively short order, especially as several prominent European economists are now suggesting that Greece set up and run a parallel currency as a precaution to the negotiations not going well. Running a parallel currency may not be such a bad idea after all; it would show the people of Greece how screwed they would be if they were forced out of the Euro and back onto their own currency. Everyone in Greece would want Euros, but the banks would only be able to give out relatively worthless drachma. The IMF seemed to be making more headlines than just those related to Greece last week as the Managing Director Christine Lagarde worked herself into the fray over when to start increasing interest rates in the US.

 

On Thursday last week the IMF released its annual report about the health of the US economy and the impact of the US economy on the global economy. This report release was followed up by a news conference held by Managing Director of the IMF Christine Lagarde. The IMF lowered the overall expected growth rate for the US economy down to 2.5 percent, down from its previous estimate of 3.1 percent. The main factors leading to the decline were the weather, the port strike on the west coast and the strength of the US dollar, which had a negative impact on US exporters. But all of this got far less attention on Thursday than Laragrde’s comment in which she said, “The economy would be better off with a rate hike in early 2016,” in reference to when the US Federal Reserve should start to increase interest rates. This was by far the most direct and blatant comment the IMF has given the US Federal Reserve regarding advice about how to do its job and the suggestion was obviously unwelcome at the Fed. Taking a shot back at the IMF on Friday was Federal Reserve Bank of New York President William Dudley as he said that in looking at the data he still thinks the Fed is likely to raise rates in 2015. He cited the strong jobs numbers for the month of May as a perfect reason as to why the US economy is doing well enough to see interest rates start to lift off and normalize. We will have to wait and see who ends up being correct as to when the appropriate time to start increasing interest rates in the US actually turns out to be.

 

Market Statistics: All three of the major US indexes moved lower for the second week in a row as the world digested Greece not making a payment and the potential for the Fed to increase interest rates to the detriment of several other regions of the world. Volume in total was average when looking at all three indexes in aggregate, but the NASDAQ saw the most volume, while the Dow saw the least:

 

Index Change Volume
NASDAQ -0.03% Above Average
S&P 500 -0.69% Average
Dow -0.90% Below Average

 

We saw the same order of the indexes in terms of performance last week that we saw two weeks ago with the NASDAQ turning in the best performance, while the Dow brought up the rear. With all three indexes still remaining in their respective trading ranges, last week was nothing more than the indexes searching for direction.

 

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
Transportation 2.58% Utilities -4.07%
Regional Banks 2.57% Residential Real Estate -2.90%
Broker Dealers 2.36% Infrastructure -2.88%
Financial Services 1.70% Semiconductors -2.61%
Insurance 0.92% Real Estate -2.35%

Transportation was the main sector above that caught my eye. After being one of the worst performing sectors for the past few weeks, the sector raced to the top of the best performing sectors last week. Semiconductors, on the other hand, went the other way, moving from the top performing sectors list for the past few weeks over to the worst performing sectors list last week. Utilities took top honors on the underperforming sectors list last week as investors seemed to be selling any of the sectors that seemed to have interest rate risk with utilities being dubbed as having the most. Real Estate also had a bit of a rough week as interest rates on home mortgages started to creep higher over the course of the week, a precursor as to what will be coming when interest rates actually do start to move with the Fed’s lift off.

The US fixed income market had one of their worst weeks of the year last week as investors became more concerned about when the Fed would increase interest rates after the warning from the IMF to the Fed, mentioned above in the international news section:

Fixed Income Change
Long (20+ years) -4.16%
Middle (7-10 years) -2.37%
Short (less than 1 year) -0.01%
TIPS -1.63%

The US dollar snapped its two week winning streak last week by falling 0.63 percent on uncertainty over what the Fed will do and when it will do it. Greece also played into the flight from the dollar last week as the obscure rule the country pulled from the IMF rule book, mentioned above, bought it some time and the Euro some wiggle room. The Euro was the best performing of the major global currencies, gaining 1.02 percent against the value of the US dollar. The weakest performing currency of the major global currencies was the Japanese Yen, which gave up 1.10 percent against the value of the US dollar.

Grains turned in a great week last week, while oil and metals continued to push lower:

Metals Change Commodities Change
Gold -1.63% Oil -1.94%
Silver -3.75% Livestock -0.99%
Copper -1.53% Grains 3.69%
Agriculture 1.97%

The overall Goldman Sachs Commodity Index turned in a loss of 1.32 percent last week with precious metals and oil weighing equally on the index. The downward move in Oil was due to the OPEC meeting on Friday, in which participants decided not to decrease daily production and the thought that a nuclear deal with Iran may lead to sanctions coming off, allowing for about 1 million barrels a day of Iranian oil to flood onto the open market. Metals were all lower last week for the second week in a row with Gold giving up 1.63 percent, while Silver fell 3.75 percent and Copper declined by 1.53 percent. Soft commodities were mixed last week with Livestock falling 0.99 percent, while Grains turned in the best performance of the week, gaining 3.69 percent and Agriculture gaining almost two percent.

On the international front, the main Chinese market is once again on a fast upward moving trajectory with the Shanghai based Se Composite Index gaining 8.92 percent over the course of the previous week; that figure is not a typo. It was a very wild ride in China this past week with Thursday alone seeing the main index down at one point nearly 6 percent and then gaining almost 7 percent in the final hour of trading. The Se Composite index also hit a major milestone last week, closing above 5,000 for the first time ever. What drove the market so high last week? There are a lot of theories about that just as there have been many theories over the past year when the index increased by more than 149 percent. One of the main reasons for the strong performance of the index is that margin debt in China has been increasing as almost everyone wants to get into the hot market and right now debt in China is relatively cheap. The other major theory is that many investors in China think President Xi will actually succeed in changing the Chinese economy from an export driven economy into an internal consumption economy. The Russian market remained at the bottom of the list last week for the second week in a row with the Russian Capped Index falling by 5.02 percent. Much of this decline is due to the fact that many people in Europe are growing more and more concerned about the fighting that seems to be picking up in Ukraine once again as the rebels seem to be pushing more and more into government held areas of the country.

After moving notably higher two weeks ago the VIX had a relatively tame week, gaining only 2.67 percent over the course of the week. At one point during the week, however, the VIX had managed to just barely break above the 52-week average level of the VIX. But this breakout was short lived (only one day) before it turned lower, closing the week under the 52-week average level. At the current level of 14.21 the VIX is implying a move of 4.1 percent over the course of the next 30 days. As always, the direction of the move is unknown.

For the trading week ending on 6/5/2015, returns in FSI’s hypothetical models* (net of a 1% annual management fee) were as follows:

  Last Week Year to Date
Aggressive Model -1.49 % -0.20 %
Aggressive Benchmark -1.00 % 2.73 %
Growth Model -1.38 % -0.81 %
Growth Benchmark -0.78  % 2.18 %
Moderate Model -1.29 % -1.07 %
Moderate Benchmark -0.55 % 1.61 %
Income Model -1.33 % -1.11 %
Income Benchmark -0.27 % 0.87 %

*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 heavily invested across our models in areas of the market that should be less volatile than the market. Last week, however, we experienced some heightened volatility in a few of our individual stock positions that really drove our overall performance. The major hit last week came from JM Smucker, which reported earnings for their most recent quarter that were in line with expectations on revenue, but slightly below expectations on earnings. However, the company did lower its guidance of the next full year in light of slowing coffee sales in the US as well as increasing raw material costs for coffee.  In total, last week JM Smucker fell by more than 6 percent, but this comes on the heels of being up more than 18 percent going into last week for the year. The other major drag on performance last week was Utilities as they seem to be unable to catch a break. At this point I am waiting for a good opportunity to lighten up a little more on Utilities, but the current downward moves looks like they are too much too fast. We continue to monitor all of our holdings and look for new investment opportunities. We are currently getting very close to the position where we will put on some hedge to offset risk in our overall models if we continue to see a breakdown in our investments and the markets in general.

 

Economic News:  Last week the focus of the economic news releases was on employment and jobs creation in the US. There was one release that missed market expectations by a significant amount (highlighted in red below) and two releases that significantly beat market expectations to the upside (highlighted in green below):

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Neutral 6/1/2015 Personal Income April 2015 0.40% 0.30%
Negative 6/1/2015 Personal Spending April 2015 0.00% 0.20%
Slightly Positive 6/1/2015 ISM Index May 2015 52.8 51.9
Neutral 6/3/2015 ADP Employment Change May 2015 201K 200K
Slightly Negative 6/3/2015 ISM Services May 2015 55.7 57.1
Neutral 6/4/2015 Initial Claims Previous Week 276K 280K
Neutral 6/4/2015 Continuing Claims Previous Week 2196K 2215K
Positive 6/5/2015 Nonfarm Payrolls May 2015 280K 225K
Positive 6/5/2015 Nonfarm Private Payrolls May 2015 262K 225K
Neutral 6/5/2015 Unemployment Rate May 2015 5.50% 5.40%
Neutral 6/5/2015 Consumer Credit April 2015 $20.5B $17.0B

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

 

Last week started off on Monday with the release of the personal income and spending figures for the month of April. Personal income increased by four tenths of a percent in line with expectations. Personal spending, however, missed expectations and turned in a zero, while the markets had been expecting an increase of two tenths of a percent. This is a negative sign for the overall health of the US economy as it signals that Americans are making more money and still not increasing spending. Spending remains the elusive part of this economic recovery and something the Fed is having a hard time figuring out. Also released on Monday was the ISM Index for the month of May, which showed that manufacturing increased at a slow pace during the month, but it was enough to be slightly better than market expectations. On Wednesday the start of the employment related releases was released with the ADP Employment change figure for the month of May, which came in almost exactly at market expectations with a print of 201,000 jobs created during the month. Later during the day on Wednesday the Services side of the ISM was released and, much like the overall ISM index, showed slow growth during the month of May. On Thursday the standard weekly unemployment related figures were released with initial and continuing jobless claims both coming in slightly better than, but very close to, market expectations. On Friday there were a few key releases that many investors had been waiting for all week. The day started with the government’s employment data report, in which nonfarm public and private payrolls both were shown to be much better than expected. The nonfarm payrolls figure of 280,000 was the best we have seen since January of 2015 and the private payrolls figures at 262,000 were the best we have seen since March 2015. Overall, the unemployment rate in the US increased slightly, moving up from 5.4 percent to 5.5 percent during the month. One other bright spot in the report was the labor force participation rate, which ticked up to 62.9 percent during the month, making it the third consecutive month that the labor force participation rate has been increasing. Average hourly earnings and manufacturing payrolls also were shown to have increased during the month in the reports that were released. The week wrapped up on Friday with the release of the consumer credit report for the month of April, which showed that consumer credit had increased by more than $20 billion during the month.

 

This is a very slow week for economic news releases with only two releases that really have a chance to impact the overall 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
6/11/2015 Initial Claims Previous Week 278K
6/11/2015 Continuing Claims Previous Week 2200K
6/11/2015 Retail Sales May 2015 1.10%
6/11/2015 Retail Sales ex-auto May 2015 0.70%
6/12/2015 PPI May 2015 0.50%
6/12/2015 Core PPI May 2015 0.10%
6/12/2015 University of Michigan Consumer Sentiment Index June 2015 91.5

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

 

This week starts out on Thursday with the release of the standard weekly unemployment related figures for the previous week, which are both expected to be slightly higher than they were last week. Retail sales figures for the month of May are also set to be released on Thursday and, from the other spending related numbers for the same time period that have already been released, it seems this release could be a bit weaker than the market is expecting. Expectations are for an increase in sales of 1.1 percent when compared to April. More likely it will print under one percent. Excluding auto sales, the picture may be a little worse with expectations being for a 0.7 percent in sales. On Friday the Producer Price Index (PPI) for the month of May is set to be released with expectations that prices overall at the producer level will be shown to have increased by 0.5 percent. Core price (prices that exclude things like food fuel and energy costs) are expected to post an increase of only 0.1 percent. Wrapping up the week on Friday is the University of Michigan’s Consumer Sentiment Index for the month of June (first estimate) with expectations that sentiment will have increased slightly from the end of last month with people making a little more money and seeing many more jobs being posted. In an interesting change of events this week, there are no Fed officials making any speeches or giving any statements. It must be a holiday week of sorts for central bankers.

 

Fun fact of the week—American Pharoah has done it!

 

The three year old horse with his name spelled incorrectly won over horse racing fans around the world on Saturday, becoming the first horse in the last 37 years and only the 12th horse ever to win the prestigious Triple Crown of Horse racing. The Triple Crown of Horse racing consists of winning the Kentucky Derby, the Preakness and the Belmont Stakes all in the same year. Other notable winners of the Triple Crown include War Admiral 1937 and Secretariat in 1973.

 

Source: http://www.belmontstakes.com

For a PDF version of the below commentary please click here Weekly Letter 6-1-2015

Commentary at a glance:

-The US markets were down last week, pushing back into their respective trading ranges.

-The revised estimate of first quarter GDP was released last week and was very negative.

-Will Greece miss a payment this week? Who cares!

-Economic news last week came in slightly below market expectations.

 

Market Wrap-Up: With last week having a market holiday on Monday it was no wonder that trading was light and the markets seemed to be searching for anything to give them direction. Ultimately, the indexes ended the week right back down in the trading ranges they have been stuck in for the majority of 2015, with no more clarity of what is to come than we had going into the week. 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 6-1-15

From a technical standpoint the charts above show the NASDAQ (lower left pane above) as being the strongest of the three main indexes with the S&P 500 (upper left pane above) coming in at a very close second. The Dow (upper right pane above) is the weakest of the major indexes as it is trading below the half way point of its most recent trading range. With the declines seen across the board last week it looks like the recent rally that started in early May has come to an end with all three of the indexes now back down in their trading ranges. Moving more into summer we will likely see the indexes continue to search for direction, with the chance of a meaningful correction ever growing as we have not had a significant correction in the markets for more than two years, which history would tell us makes it long overdue. While the markets were moving lower last week the VIX was not as it increased by more than 14 percent off of the lowest point we have seen so far during 2015.

 

National News: The national news last week focused on two main topics: the weakness being seen in the US economy and the end of earnings season. Last week the government revised its first quarter GDP figure from 0.2 percent down to -0.7 percent for the quarter. This is a major revision that made an initially weak figure look even worse now.  With such a negative print on GDP it is hard to see how the Fed could start to increase interest rates any time soon as we are not currently experiencing a strong US economy.  The chart to the right from investing.com shows the past two years of GDP releases. You may notice that the current bar looks almost exactly the same as this time last year, when the winter weather was also blamed for causing a slowdown in the US economy.  Last year the third and final revision was even lower than the second revision so we will have to wait and see if this is the case this time around or not. From the data that has been released it looks like the second quarter of 2015 will show a rebound in the US economy, but we will still likely be growing at a slower pace than this time last year when GDP shot up to near four percent.

GDP 6-1-15

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

 

Autozone 50% Express 57% Seadrill 39%
Big Lots 2% Flowers Foods -3% Splunk -14%
Costco Wholesale 2% Popeyes Louisiana Kitchen 9% Tiffany & Co 17%
DSW 9% Sanderson Farms -11% Toll Brothers 0%

 

Higher end retailers seemed to fare better last week, as illustrated by the results from Tiffany & Co and Express when compared to the discount retailers such as Big Lots and DSW. One company that disappointed last week was Splunk, a darling of the big data and cloud based computing industry. Expectations had been for a loss of $0.49 per share and they posted a loss of $0.56, despite adding 450 new customers during the quarter and now claiming to be working with 80 of the Fortune 100 companies in the world. On the US housing market front, Toll Brothers, one of the largest builders of luxury homes in the US, posted a quarter that was in line with expectations, despite the strong performance in the US housing market we saw during the quarter.

 

According to Factset Research we have now seen 494 (99 percent) of the S&P 500 companies release their results for the first quarter of 2015. Of the 494 that have released, 71 percent of them 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 all but officially done with earnings announcements for the first quarter of 2015. 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 last week as is expected this late towards the end of the reporting season. When looking at 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. Forward guidance for the second quarter of 2015 changes by one on both negative and positive guidance with 75 companies, according to Factset, having issued negative guidance while 28 companies have issued positive forward guidance for the next quarter. While these numbers may seem a little concerning at first glance they should not as companies are notorious for guiding earnings way down so they can easily beat those depressed expectations.

 

This week pretty much wraps up earnings announcements for the first quarter of 2015 as all of the remaining S&P 500 component companies release their results. 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 overall markets highlighted in green:

 

Conns Hooker Furniture Medtronic
Diamond Foods IDT Michaels Companies
Dollar General J M Smucker Sears
GUESS? Joy Global Zoe’s Kitchen

 

If this week follows what we have been seeing over the past few weeks from retailers, we will likely see the lower end retailers such as Dollar General release earnings that are in line with expectations, while some of the higher end retailers such as Hooker Furniture and Guess should beat expectations. Sears is always an interesting company to watch since it is run by a hedge fund manager who ended up buying enough shares of the company a few years back to take control. The integration of Kmart never really worked out and the company is now more of a real estate play than a retailer, but it is one that Wall Street enjoys watching as it struggles along.

 

International News: International news last week was somewhat amusing as there were a number of stories that made headlines, some that we have heard before and others that were brand new. Russia made headlines early during the week as President Putin announced a surprise military drill in the same area as the NATO training exercises that had been planned to take place for more than a year. As always, Russia had to flex its military might, so while the NATO exercise had about 4,000 participants, the Russian exercise had 12,000 participants. While there was no chance of any conflict occurring between the two sides during these games the financial community reacted negatively to Russia, sending the main Russian stock market down by more than 6 percent. Elsewhere in the world last week FIFA was coming under fire for corruption in a very large scale pay to play scheme that made many headlines during the middle of the week.

 

FIFA (The Fédération Internationale de Football Association) is the international governing body for Football as it is known everywhere other than the US where we call the sport soccer. The organization came under fire last week by the FBI as well as several other law enforcement groups around the world. Several high ranking members of FIFA were arrested in Switzerland ahead of the vote for FIFA President held on Friday. The accusations are that countries paid millions in bribes to secure having the World Cup be played in their countries. Russia also played a role in this story as President Putin said the US should mind its own business when it comes to football. This is because Russia “won” the 2018 World Cup, but it now looks like Russia probably just paid the highest amount of money to secure the World Cup coming to Russia. The impact from the scandal with FIFA could roll over to the global financial markets in the form of more banking oversight. If it is found that any of the major international banks handled the transfer of payments between countries and FIFA they could find themselves in the middle of investigations that could have far reaching impacts. So far it looks like Barclays will take much of the fall as it dealt the most with FIFA. The other major impact the FIFA scandal could have on business concerns the advertising industry as advertising at the World Cup is almost as lucrative as advertising at the Olympics or the Super Bowl. Coca-Cola, Visa and McDonalds are three of the biggest names with a lot at stake in the World Cup, so it will be interesting to see how they react in the coming weeks to the allegations.

 

Greece made international news headlines again last week as it looks like the country is once again rooting around in the couch to find more loose change to pay the IMF. Greece owes about 1.6 billion Euros to European creditors over the next few weeks with the first of the major payments, being a 400 million Euro payment to the IMF, due on June 5th. Throughout the week last week there were very conflicting stories about how the negotiations were going. The Greek finance minister kept saying a deal was very close and they were for sure going to get it done in time. The rest of the Europeans and the IMF, however, said a deal was not close and it looked unlikely that anything would be agreed to prior to the deadline passing. We have all seen this play out time and time again with Greece; both sides posturing to make themselves look good while in the end they come together and Europe gives more money to Greece. At some point something is going to be missed or a deal will not be struck, but there does not appear to be any more reason for that time to be now than it has been any of the previous times.

 

Market Statistics: All three of the major US indexes moved lower over the course of the shortened trading week last week as fears over Europe and a slowdown in the US economy weighted heavily on investors’ minds. Volume was light, as expected, but volume was still light when looking at just the 4 days the markets were open last week compared to the previous four trading days’ average volume.

 

Index Change Volume
NASDAQ -0.38% Below Average
S&P 500 -0.88% Below Average
Dow -1.21% Below Average

 

Energy was the primary driver of the poor performance last week as oil continued to slide as supply increased globally. As we move fully into the summer months it would not be surprising to see the markets continue to move in a sideways direction searching for direction and hanging on various news stories.

 

When looking at sectors, the following were the top 5 and bottom 5 performers over the course of the previous week:

 

Top 5 Sectors Change Bottom 5 Sectors Change
Semiconductors 3.62% Oil & Gas Exploration -2.46%
Healthcare Providers 1.29% Energy -2.43%
Pharmaceuticals 1.23% International Real Estate -2.37%
Technology 0.76% Natural Resources -2.35%
Telecommunications 0.47% Transportation -2.01%

 

High technology and healthcare had a strong week last week thanks in large part to merger and acquisition deals that were announced during the week, as the industries that are flush with cheap cash are starting to put more and more of it to work. The deal everyone seemed to be talking about was the announcement by Avago Technologies that it will buy Broadcom Corp for $37 billion, in what will amount to the largest high technology buyout deal ever. Both companies are chip makers producing many chips in personal electronics, such as smart phones and computers. On the flip side, negative sectors last week primarily consisted of sectors with exposure to the oil industry as oil moved notably lower.

The US fixed income market was positive last week as global fixed income investors continue to speculate as to when the Fed will enter liftoff mode in the US with interest rates given the poor economic data released during the week last week:

Fixed Income Change
Long (20+ years) 1.92%
Middle (7-10 years) 0.72%
Short (less than 1 year) 0.00%
TIPS 0.25%

The US dollar made it two weeks in a row of gains last week, gaining 0.71 percent against a basket of international currencies. Much of the rally in the US dollar appeared to be due to the continued uncertainty surrounding the situation in Greece and Europe as the clock continued to tick down for the Greeks to come up with 400 million Euros to make a payment to the IMF on the 5th. 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 was the Swiss Franc, which gained 0.40 percent against the value of the US dollar. The weakest of the global currencies last week was the Australian Dollar, which fell by 2.29 percent against the value of the US dollar after commodities globally slid during the course of the week.

Livestock was the only commodity that did not move noticeably lower last week as all of the other major commodities turned in a very trying week:

Metals Change Commodities Change
Gold -1.30% Oil -3.42%
Silver -2.14% Livestock 0.00%
Copper -2.71% Grains -2.95%
Agriculture -1.80%

The overall Goldman Sachs Commodity Index turned in a loss of 1.03 percent last week with oil being the primary driver of the decline. The downward move in oil was due to an oversupply and concerns that a supply meeting being held at the end of this week could lead to even more oversupply on a global level. Metals were all lower last week with Gold giving up 1.30 percent, while Silver fell 2.14 percent and Copper declined for the second week in a row by 2.71 percent. Soft commodities were mixed last week with Livestock turning in a zero percent change, while Grains fell nearly three percent and Agriculture fell almost two percent.

On the international front the Australian market moved to the top of the list with the Sydney based All Ordinaries Index gaining 1.88 percent over the course of the previous week. This positive performance in Australia comes despite the weakness that was seen in much of the commodity markets last week; commodities are the main exports for Australia. The Russian market once again moved to the bottom of the list last week with the Russian Capped Index falling by 6.31 percent after Russian President Putin ordered the largest surprise military exercise of the year to take place during the middle of the week; the same time as a much smaller NATO military exercise was also taking place.

Last week we finally saw a move in the VIX with the VIX jumping more than 14 percent over the course of the week, moving off the lowest point of the year on Tuesday with a strong rally. Could this be the markets finally taking notice that the situation in Greece is very tenuous? Perhaps, but the VIX is still running significantly below the average level we have seen over the past year so it is unlikely to be factoring in the situation in Greece falling apart. At the current level of 13.84, the VIX is implying a move of 3.99 percent over the course of the next 30 days. As always, the direction of the move is unknown.

For the shortened trading week ending on 5/29/2015, returns in FSI’s hypothetical models* (net of a 1% annual management fee) were as follows:

Last Week Year to Date
Aggressive Model -0.71 % 1.31 %
Aggressive Benchmark -1.39 % 3.77 %
Growth Model -0.54 % 0.59 %
Growth Benchmark -1.08  % 2.98 %
Moderate Model -0.35 % 0.23 %
Moderate Benchmark -0.77 % 2.17 %
Income Model -0.29 % 0.23 %
Income Benchmark -0.39 % 1.14 %

*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 almost fully invested across our models, but we are invested in assets that should be significantly less volatile than the overall market. Energy remains one of the most interesting potential investment opportunities as it has come down so much over the past nine months, but the industry looks poised to move down a bit more prior to moving higher. The OPEC meeting held later this week may shed a little more light on the situation as far as the supply that the cartel will supply to the world over the coming months; this information could push oil prices even lower, creating an even better buying opportunity.

 

Economic News:  Despite last week being a holiday shortened trading week, there were numerous economic news releases released during the four trading days of the week. There was one release that missed market expectations by a significant amount and one that is significantly negative (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 5/26/2015 Durable Orders April 2015 -0.50% -0.60%
Slightly Positive 5/26/2015 Durable Goods -ex transportation April 2015 0.50% 0.30%
Neutral 5/26/2015 Case-Shiller 20-city Index May 2015 5.00% 4.60%
Neutral 5/26/2015 New Home Sales April 2015 517K 510K
Neutral 5/26/2015 Consumer Confidence May 2015 95.4 94
Neutral 5/28/2015 Initial Claims Previous Week 282K 274K
Neutral 5/28/2015 Continuing Claims Previous Week 2222K 2250K
Slightly Positive 5/28/2015 Pending Home Sales April 2015 3.40% 1.00%
Negative 5/29/2015 GDP – Second Estimate Q1 2015 -0.70% -0.70%
Negative 5/29/2015 Chicago PMI May 2015 46.2 53
Neutral 5/29/2015 University of Michigan Consumer Sentiment May 2015 90.7 89

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

 

Last week started out on Tuesday with the release of the Durable goods orders for the month of April. Orders both including and excluding transportation came in very close to market expectations and therefore had little impact on the overall markets. Also released on Tuesday were two US housing data points, those being the Case-Shiller 20-City Home Price index for May and the new home sales figure for the month of April. The Case-Shiller index indicated that home prices in the US appreciated by 5 percent on an annual basis between May of 2014 and May of 2015. New home sales came in at more than 500,000 units, which is a fairly strong showing given the time of year. Later during the day on Tuesday the US government released its estimation of consumer confidence for the month of May and it indicated that confidence increased during the month. This is almost the total opposite of what the other confidence surveys and indexes have been showing and leads some to wonder about the validity of the figure. On Thursday the standard weekly unemployment related figures were released with initial jobless claims coming in slightly higher than anticipated and continuing jobless claims coming in slightly lower than expected, thus having an offsetting impact on each of the releases. Later on Thursday the pending home sales figure for the month of April was released with the figure showing an increase of 3.4 percent, while expectations had been for only 1 percent. Pending home sales are less important than actual home sales, but it is still nice to see the number moving in the correct direction. On Friday we had two very bad releases, those being the second estimate for first quarter GDP in the US and the Chicago PMI. GDP was revised down from 0.2 (first estimate) all of the way down to a negative 0.7 percent for the first quarter of 2015. This contraction in GDP was blamed in part on the wild weather we saw over much of the east coast. It is troubling that the US economy was so weak that weather could push us all of the way into a contraction. The second negative release of the day was the Chicago area PMI, which provides a glimpse into the Chicago area manufacturing industry, and the glimpse was not positive. Expectations were for a slight increase from 52.3 up to 53 over the course of May, but instead the index fell back below 50, signaling a contraction with a reading of 46.2. This is the third month out of the past four that we have seen manufacturing in the greater Chicago area contract, a sign of economic weakness in a region that never has fully recovered from the Great recession of 2008. Wrapping up the week last week was the release of the University of Michigan’s Consumer Sentiment Index for the month of May (final revision). Expectations had been for a number under 90 and the reading came in at 90.7. Typically this may be seen as positive, but in light of the other negative release of the day this release was overlooked by the markets.

 

The focus of the releases this week will be on employment. The releases highlighted below have the potential to move the overall markets on the day they are released:

 

Date Release Release Range Market Expectation
6/1/2015 Personal Income April 2015 0.30%
6/1/2015 Personal Spending April 2015 0.20%
6/1/2015 ISM Index May 2015 51.9
6/3/2015 ADP Employment Change May 2015 200K
6/3/2015 ISM Services May 2015 57.1
6/4/2015 Initial Claims Previous Week 280K
6/4/2015 Continuing Claims Previous Week 2215K
6/5/2015 Nonfarm Payrolls May 2015 225K
6/5/2015 Nonfarm Private Payrolls May 2015 225K
6/5/2015 Unemployment Rate May 2015 5.40%
6/5/2015 Consumer Credit April 2015 $17.0B

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

 

This week starts on Monday with the release of the latest personal income and spending figures for the month of April, both of which are expected to show a slight increase. I have highlighted the spending release as this release is more important than the income release as we need US consumers to spend money in order to get the economy moving forward and full speed. Also released on Monday is the ISM Index for the month of May, but after the poor Chicago number printed last week it seems like a lofty goal to see a reading of 51.9 on this release. On Wednesday the first of the employment related figures is set to be released, that being the ADP employment change index for the month of May, which is expected to show that 200,000 jobs were created during the month. The Services side of the ISM is also set to be released on Wednesday and will likely move in the same direction as the overall ISM index released on Monday. On Thursday the standard weekly unemployment related figures are set to be released with initial and continuing jobless claims both not expected to show much move over the levels seen last week. Friday is the day that everyone will be waiting for this week, as the government is set to release a lot of information. The biggest headline release on Friday is the release of the official unemployment rate as measured by the government. Expectations are for no change from 5.4 percent, which was hit back in April, but anything plus or minus two tenths of a percent is possible on this release. More important than the headline unemployment rate, however, are the payrolls figures, both public and private, which are expected to both show a reading of 225,000. In addition to the standard employment figures, the government also releases all of the other employment information such as the participation rate, various other measures of unemployment and under employment (such as the U6 rate). The markets will be watching a few of these figures much more closely than the headline figures as these underlying figures are what the Fed is watching in helping to determine when to start increasing interest rates. Wrapping up the week on Friday is the release of Consumer Credit for the month of April, which is expected to show an increase of about $17 billion during the month, despite the lending institutions tightening their lending standards ahead of increasing interest rates. In addition to the scheduled economic news releases there are also five different Fed officials giving speeches throughout the week this week and while there will likely not be anything new in any of the speeches the markets still like to hang onto every word just in case.

 

Fun fact of the week—World Cup

 

The FIFA World Cup is the biggest soccer tournament in the world with over a billion people tuning in to watch 32 countries battle it out at different venues in the host country to lift the much coveted FIFA World Cup. 18 tournaments have been held since 1930. Only seven nations have won the prestigious World Cup. Brazil is on top of the list with 5 wins, followed closely by Italy and Germany with 4 and 3 wins respectively. Argentina and Uruguay have 2 titles each and England and France have one each.

Source: http://www.sporting99.com

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

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