For a PDF version of the below commentary please click here

Commentary quick take:

 

  • Major developments:
    • Largest single day drop of the year
    • VIX spiked by 40 percent
    • All three US markets down
    • President Trump cannot get out of his own way

 

  • US:
    • Problems continue for President Trump
    • First Quarter earnings
      • Strongest growth rate since 2011
      • 95 percent complete
      • Earnings growth rate currently at 13.9 percent
    • President Trump heads out on his first foreign trip

 

  • Global:
    • Corruption in Brazil
    • Emerging markets rattled

 

  • Technical market view:
    • NASDAQ remains strongest index
    • Dow nearly fell through trading range
    • VIX touched second highest point this year
    • Uncertainty has returned in the markets

 

  • Hybrid investments strategy update:
    • No changes in hybrid allocation
    • Performed well in the downturn and subsequent rally

 

  • This week for the markets:
    • Trump’s foreign trip
    • The end of first quarter earnings season
    • Reaction to North Korea missile launches
    • OPEC meeting
    • Summer trading underway

 

  • Interesting Fact: Who was the first US President to officially go abroad?

 

Major theme of the markets last week: Political uncertainty

As the ongoing saga over possible Russian and Trump Administration contacts or wrong doing continued to heat up last week, the markets took more notice and moved lower in a big way. On Wednesday, the US markets experienced the worst single day decline since September of 2016, seemingly shattering the “all will be fine” mentality that has been in place since President Trump won the election. With the downward move in the markets, the VIX also came to life, at one point jumping by more than 40 percent on its way to the largest spike that we have seen all year. Some of the bearish investors started to call out that the sky was falling, adding further fear into a market that was already spooked. These fears were short lived as the markets recovered a large percentage of Wednesday’s decline on Thursday and Friday, ending the week with modest losses. Perhaps more important, the complacency that was starting to be deeply rooted in the minds of investors about risk was questioned, which could lead to potential changes in how they invest in the future.

 

US news impacting the financial markets:

As mentioned above, the primary focus of the US financial markets last week was the tenuous situation in US politics. The markets had largely ignored the day-to-day operations in Washington DC, as indicated by the low level of the VIX, but that changed in a hurry last week as the VIX jumped more than 40 percent on Wednesday, as depicted in the chart from CBOE to the right. The spike in risk and downward movement of the markets seemed to come from the realization that all of President Trump’s agenda is at risk if the administration cannot get past the Russian inquiry. President Trump’s awkward firing of FBI director James Comey only added fuel to the fire as recollections of what President Trump said and to whom he spoke to about the firing paints a very unflattering image. Democrats on the Hill are calling for several types of investigations, including a special prosecutor to oversee things. Republicans are trying to focus more on what they can accomplish in Congress, rather than getting into the mess with the administration. Even some well-known Republicans have uttered the impeachment word to the media. Infighting between staff members of the administration seems to be increasing, as is the amount of information being leaked to the media from within the administration. With President Trump on the move this week, visiting various locations in the Middle East and Europe, we will get a chance to see if things settle down in Washington DC. We are starting to enter a time of year when small news stories get blown way out of proportion—and there is no lack of stories coming out right now, especially about the Trump administration. One story that has been largely positive and will likely remain so is the earnings season for the first quarter of 2017, which is quickly coming to a close.

 

Retailers continued to be the primary focus of earnings reports last week as earnings season for the first quarter continues to come to an end. Below is a table of the well-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% Dicks Sporting Goods 0% Ross Stores 4%
Alibaba -17% Foot Locker 1% Red Robin Gourmet Burgers 53%
Buckle 6% Gap 24% Staples 0%
Campbell Soup 8% Home Depot 4% Target 36%
Salesforce.com 20% Jack In The Box 9% Tj Maxx 4%
Cisco Systems 2% L Brands 14% Urban Outfitter -19%
Deere & Co 48% Ralph Lauren 13% Wal-Mart Stores 4%

 

Wal-Mart was the primary focus of the financial markets last week in terms of earnings and the company announced better than expected results led by strong same store sales and increased foot traffic. However, Wall Street seemed more interested in the increases seen in Wal-Mart’s online business. The main competitor of Wal-Mart (Target) had a very good quarter, but still greatly lags behind Wal-Mart and Amazon in almost every category. All of the other retailers, with the exception of Urban Outfitter, turned in positive results last week, mostly due to the very low bar set by analysts going into the quarter for the group.

 

According to Factset Research, we have seen 478 (95 percent) of the S&P 500 companies release their results for the first quarter of 2017. Of the 478 that have released earnings, 75 percent have beaten earnings estimates, while 7 percent have met expectations and 18 percent have fallen short of expectations. When looking at revenue, of the companies that have reported, 64 percent of the companies have beaten estimates, while 36 percent have fallen short. The overall earnings growth rate for the S&P 500 that we have seen thus far stands at 13.9 percent, which is the highest growth rate that we have seen on the S&P 500 since third quarter 2011. With the reporting season so close to being finished, it makes sense at this point to look at how this past quarter stacked up against past quarters. When looking at earnings per share this quarter, 75 percent of companies beating expectations is higher than both the 1- and 5-year averages, which are 70 and 68 percent, respectively. On the revenue side, 64 percent of companies have beaten expectations and this figure is significantly above both the 1- and 5-year average, which are both 53 percent. First quarter was a strong quarter for Energy, Industrials, Information Technology, Healthcare and Financials. Looking to the future, Factset has compiled the data for the second quarter earnings expectations from analysts, which now expect earnings for the S&P 500 to grow by 6.8 percent.

 

This week is the last week that I will be including a table of upcoming earnings releases for the current week. Following this week there is a sharp decline in the number of companies reporting earnings as the markets start to gear up for the start of second quarter earnings reports. Retailers will once again be the primary focus of earnings reports this week. The table below shows the companies that have the greatest potential to move the markets highlighted in green:

 

Agilent Technologies Dsw Medtronic
Advance Auto Parts Express Shoe Carnival
AutoZone Guess? Splunk
Best Buy GameStop Tiffany & Co
Burlington Stores Hp Toll Brothers
Costco Wholesale Intuit Ulta Beauty
Dollar Tree Lowe’s Companies Williams-Sonoma

 

This week is much like the last when retailers made up most of the companies that are announcing results. Costco will be in the spotlight as the company serves many small businesses across the US. Lowe’s will also be closely watched to see if the company performed as well as Home Depot during the quarter. Toll Brothers will be of interest to people wanting a glimpse into the higher end real estate market as the company reports its results this week. When looking at the performance of the stock (up 16 percent for the first quarter), one would think that Toll Brothers had an exceptional quarter, but we will just have to wait and see if it pans out in the earnings numbers.

 

Global news impacting the markets:

 

Aside from the global media discussion about President Trump’s first trip abroad as President, the primary focus of the global media was on Latin America. Brazil made many headlines last week as the political uncertainty that plagued the country during previous President Dilma Rousseff’s tenure seems ongoing. Last year, Brazilian Vice President Michel Temer took over when Brazilian President Rousseff was impeached and ultimately thrown out of office. Now it has come to light that current President Temer has also been complacent in bribery and other illegal activities that will likely result in his removal from office, either by choice or by force. With Brazil being such a large player in the global commodity markets, political unrest has far reaching potential impacts. The Brazilian stock exchange fell by more than 8 percent on Thursday last week when the news came out about the corruption case against the President. It did not recover much over the following trading days. The effects were seen here in the US as many of the global funds and emerging market mutual funds dropped by the largest amount so far in 2017 on the news. Emerging markets seems to be an investment that is either all or none for many investors, with seemingly no time wasted between something negative occurring and the asset class being indiscriminately sold. With the current round of elections completed in Europe and Asia and a lull of economic data, the global markets will fall back to their favorite pastime of watching political scandals both here in the US and in Brazil over the coming weeks.

 

Technical market review:

 

There were no adjustments needed on the charts below over the course of the previous week. The green lines remain the daily index movements, while the yellow lines are the same trading ranges that have been drawn for the past several weeks. The red line on the VIX chart remains the 52-week average level of the VIX.

There were many noticeable things that occurred on the technical charts last week. First, the VIX (lower right pane above) spiked up at the fastest rate that we have seen in a long time. The VIX hit roughly the same level that was seen on the worries over the vote in the Netherlands earlier this year. Such a large spike is normally followed by a decline as the VIX moved too far too fast. This was the case as the VIX pushed lower during the trading days following the spike. The NASDAQ, the hardest hit index on Wednesday, remains the strongest in terms of technical strength as it is clearly above its most recent trading range. The S&P 500 (upper left pane above) is in second place as the index came crashing back into its trading range and proceeded to make an attempt on retaking the upper edge of the trading range over the last two trading days of the week. The Dow (upper right pane above) is the weakest of the three major indexes as it fell through its trading range last week and bounced off the lower bound of the range, ending the week near the half way point of the range. One thing to keep in mind with the movements seen last week is that large moves, such as the spike in the VIX and the bouncing of the indexes, tend to cluster. This means they are not one-off events, but rather one in a series that occurs in a brief period. Once volatility spikes there is a good chance that there will be further spikes and declines for the same underlying reasons. The political situation in Washington DC is unlikely to be worked out any time soon so we should be ready for more episodes like we saw last week.

 

Hybrid model performance and update

For the trading week ending on 5/19/2017, returns in the hybrid and quant hypothetical models* (net of a 1% annual management fee) were as follows:

 

  Last Week 2017 YTD Since 6/30/2015
Aggressive Model 0.02% 3.47% 9.01%
Aggressive Benchmark 0.02% 8.06% 7.86%
Growth Model 0.25% 3.61% 8.27%
Growth Benchmark 0.02% 6.28% 6.43%
Moderate Model 0.46% 3.42% 7.18%
Moderate Benchmark 0.02% 4.51% 4.89%
Income Model 0.60% 3.50% 7.06%
Income Benchmark 0.02% 2.35% 2.83%
Quant Model 0.70% 10.15%
S&P 500 -0.38% 6.38% 15.44%

*Model performance does not represent any specific account performance but rather a model of holdings based on risk levels that are like my actual holdings, the hypothetical models are rebalanced daily to model targets.

 

There were no changes made to the hybrid models over the course of the previous week. The models were tested during the week last week in terms of downside risk and they performed very well. Wednesday last week was the big down day for the market with the S&P 500 falling 1.82 percent, its largest single day decline thus far in 2017. The hybrid models performed as expected during the single day decline with the Aggressive, Growth, Moderate and Income model performance being -0.99, -0.70, -0.38 and -0.17 percent; respectively. The participation rate on the downside ranged from 55 percent down to just 9 percent. On the two days following the decline when the market staged a recovery the hybrid models also performed well, participating in between 43 and 71 percent of the upside. This is a classic short-term example of winning by not losing as much, which is a core tenant of the hybrid models. The quant model turned in a very strong week on a relative basis, being only partially invested going into the decline on Wednesday, getting fully invested following the decline for Thursday’s market session and ending the week by moving fully to cash for Friday’s market session.

 

Market Statistics:

 

Last week was a wild week for the US financial markets as they tumbled mid-week, only to recover part of the declines to end the week:

 

Index Change Volume
S&P 500 -0.38% Below Average
Dow -0.44% Average
NASDAQ -0.61% Average

 

Despite the large movements of the markets intraweek last week, the overall volume was still just at or slightly below average, based on the average weekly volume that we have seen over the past year. As is expected during a week that saw a significant risk-off trade, the NASDAQ turned in the worst performance of the three major indexes. Both the Dow and the S&P 500 were relatively close to each other in terms of overall performance.

 

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
Utilities 1.80%   Transportation -1.36%
Home Construction 1.67%   Broker Dealers -1.53%
Semiconductors 1.50%   Regional Banks -1.71%
Residential Real Estate 1.44%   Multimedia Networking -1.84%
Consumer Staples 1.26%   Pharmaceuticals -2.08%

 

The sector performance last week was very interesting as there was a blend of risk-on and risk-off sectors both leading the way and lagging. On the positive side, Utilities, Real Estate and Consumer Staples are all defensive sectors that saw strong performance. Home Construction and Semiconductors are two non-defensive sectors that also made it into the top 5 performing sectors last week as expectations for both sectors remain high with the US housing market still going strong and the upcoming release of the new iPhone 8. On the negative side, Transportation, which is a defensive sector, made the list, which was unusual, but could have had something to do with the airline industry moving lower due to the potential laptop flight ban. Higher risk sectors of the markets that do poorly in a risk-off trade, such as Pharmaceuticals, Broker Dealers and Regional Banks; made the negative list, as was expected. The oddball on the negative list last week was Multimedia Networking, which may have had its performance impacted by an FCC ruling that came down last week more than anything else.

 

When there is a general risk-off trade in the equity markets, there are typically increases seen in the fixed income market and last week was no exception. Fixed income across the curve enjoyed a strong week of performance. With the uncertainty surrounding President Trump, fixed income is one of the safest assets that investors took shelter in.

 

Fixed Income Change
Long (20+ years) 1.91%
Middle (7-10 years) 0.81%
Short (less than 1 year) 0.04%
TIPS 0.72%

Global currency trading volume was average last week as traders adjusted positions on several different unfolding political situations. Overall, the US dollar declined 2.03 percent against a basket of international currencies. The best performing of the global currencies last week was the Icelandic Krona, as it gained 4.2 percent against the value of the US dollar. Much of this gain was due to the country being about as insulated from the political turmoil of last week as is possible. The worst performance among the global currencies was the Brazilian Real, with a decline of 4.1 percent against the US dollar for the week as yet another political corruption scandal seems to be emerging.

Commodities were all positive last week, as oil made it two weeks in a row of gains ahead of an OPEC meeting this week:

Metals Change   Commodities Change
Gold 2.20%   Oil 5.33%
Silver 2.38%   Livestock 0.40%
Copper 2.48%   Grains 0.00%
      Agriculture 0.30%

The overall Goldman Sachs Commodity Index advanced 2.86 percent last week. Oil contributed to a large part of the increase in the overall commodity index as it gained 5.33 percent. Much of the oil increase was due to continued rumbling out of OPEC ahead of the scheduled meeting, which will take place on Thursday this week. Metals were positive last week with Gold, Silver and Copper advancing 2.2, 2.38 and 2.48 percent; respectively. Soft commodities were positive last week with Agriculture gaining 0.30 percent, while Livestock advanced 0.40 percent and Grains held steady, printing zero movement on a week-to-week basis.

Top 2 Indexes Country Change   Bottom 2 Indexes Country Change
Caracas General Venezuela 18.08%   The Global Dow Euro World -2.31%
ATX Austria 2.57%   Sao Paulo Bovespa Brazil -8.18%

Last week was a difficult week for global financial markets, with only 36 percent of the markets posting gains. The best performing index last week was found in Venezuela, as the Caracas General Index turned in a gain of 18.08 percent for the week. This gain in Venezuela comes at a time when the protests against the Maduro government are becoming increasingly violent, which is counter intuitive to why the index increased. The worst performing index last week was found in Brazil and was the Sao Paulo based Bovespa Index, which turned in a loss of 8.18 percent as the country faces another scandal surrounding President Michel Temer, who took over after a corruption scandal sent past-President Dilma Rousseff packing, in which he may be just as corrupt as she was and will likely be forced out of office, keeping the revolving door of the Brazilian Presidency turning.

As mentioned in the above commentary, the VIX sprang back to life last week, even if the move ends up being very short lived. On a weekly basis, the VIX gained only 15.77 percent. Intra-week, at one point the gain was more than 40 percent. The current reading of 12.04 implies that a move of 3.48 percent is likely to occur over the next 30 days. As always, the direction of the move over the next 30 days is unknown.

Economic Release Calendar:

 

Economic news releases last week were more interesting than is normal during a slow week, as the manufacturing data presented opposite signals:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Negative 5/15/2017 Empire Manufacturing May 2017 -1.00 7.50
Neutral 5/16/2017 Housing Starts April 2017 1172K 1255K
Neutral 5/16/2017 Building Permits April 2017 1229K 1270K
Positive 5/18/2017 Philadelphia Fed May 2017 38.8 18.50

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

 

On Monday, the Empire manufacturing index for the month of May was released and really missed expectations to the downside. Expectations for the release were for the manufacturing industry in the greater New York area to have increased at a significantly faster pace than the 0.4 reading from April. However, the release for May came in at -1, which means that manufacturing in the region contracted during the month. While it is only a single data point, it is still concerning. On Tuesday, both the housing starts and building permit figures were released for the month of April and both came in slightly below expectations, but not far enough below to cause any concerns about the health of the US housing market. On Thursday, the market got some relief from the scare of the Empire index released on Monday when the Philadelphia Fed released its business conditions index, with the reading coming in more than double what was expected. The strong reading on the index was not just one small section of the index, but overall, including manufacturing. With such mixed signals about manufacturing coming out last week, each will have a neutralizing effect on the other in the eyes of economists.

 

This is a slow week for economic news, but there are a few releases that could have a noticeable impact on the markets:

 

Date Release Release Range Market Expectation
5/23/2017 New Home Sales April 2017 605K
5/24/2017 Existing Home Sales April 2017 5.65M
5/26/2017 Durable Orders April 2017 -1.8%
5/26/2017 Durable Goods –ex transportation April 2017 0.4%
5/26/2017 GDP – Second Estimate Q1 2017 0.8%
5/26/2017 University of Michigan Consumer Sentiment Index May 2017 97.7

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

 

This week the economic news releases start on Tuesday with the release of the new home sales figure for the month of April. Expectations are for April to be slightly lower than they were in March, but not by enough to cause concern. On Wednesday, the existing home sales figure for the month of April is set to be released and it too is expected to be slightly weaker than it was in March, but again not by enough to make an impact. Friday is a big day for economic news releases this week as the durable goods orders for the month of April kick things off. Overall, durable goods orders are expected to post a decline of 1.8 percent compared to a gain of 0.7 percent in March. This would be taken as a step backwards for the overall economy if the number proves to be correct. However, automobile sales will take the blame, which should soften the overall blow. Durable Goods orders excluding auto sales are expected to post a 0.4 percent gain for the month, which would be an improvement over the -0.2 reading for the month of March. Both numbers really need to be positive if the economy overall is to continue growing. We get an idea of just how the economy is growing on Friday with the second revision to the first quarter 2017 GDP figure. The GDP print is expected to be increased by one tenth of a percent when compared to the first estimate, but this seems a little optimistic given the data that more recently came out about the first quarter. We could see a bit of a miss on this figure that could negatively impact the overall market movement on Friday. Wrapping up the week on Friday is the release of the University of Michigan Consumer Sentiment Index for the month of May (mid-month estimate), which is expected to show no change over the end of April reading of 97.7. In addition to the economic news releases that are scheduled for this week, there are also nine speeches being given by Federal Reserve officials as well as the minutes from the last FOMC being released on Wednesday, which could make for an interesting week.

 

Interesting Fact First President Abroad

 

Theodore Roosevelt – the 26th U.S. president – was the first to go abroad for an official visit when he went on a tour of Puerto Rico (a new U.S. colony at the time) and Panama (then a new U.S. client state) in 1906.

 

Source: https://www.theglobalist.com/united-states-presidents-abroad/

For a PDF version of the below commentary please click here Weekly Letter 5-15-2017

Commentary quick take:

 

  • Major developments:
    • Mixed market movements last week
    • Earnings season starting to end
    • Retail spending remains weak
    • FBI Director Comey has been fired

 

  • US:
    • Retail sales weakness persists
    • Retail bankruptcies increasing
    • First Quarter earnings
      • Strongest growth rate since 2011
      • 91 percent complete
      • Earnings growth rate currently at 13.6 percent
    • FBI Director Comey fired by President Trump

 

  • Global:
    • Emmanuel Macron sworn in as President of France
    • President Macron picked centre-right leaning mayor to be PM
    • Warnings over China banking system

 

  • Technical market view:
    • NASDAQ remains strongest index
    • Dow broke back down into trading range
    • VIX touched lowest point since December of 1993

 

  • Hybrid investments strategy update:
    • One new purchase

 

  • This week for the markets:
    • Reaction to North Korea missile launch
    • Should be a slow week for the markets
    • Summer trading underway

 

  • Interesting Fact: How long do FBI directors typically stay in office?

 

Major theme of the markets last week: Market complacency

The VIX made several headlines last week due to the ultra-low points reached during the week. On Monday, the VIX closed at 9.77, which was the lowest closing price on the VIX going all the way back to December 27th, 1993. The complacency of fear in the market is not limited to the VIX that is derived from the S&P 500; other VIX measures of equity and fixed income indexes are also at multiple year lows. Why are the fear gauges currently so low? One factor that has pushed the VIX measurements lower is the fall of the populist movement in Europe, which at its height had some pundits thinking it could be the end of the EU and the Euro. Another factor that has driven fear out of the markets is the first quarter earnings season, which is quickly ending. This earnings season is one of the best that we have seen in many years here in the US. While some fears were brought up on numerous conference calls with managements across the US, most of the teams saw the economy picking up and continuing to expand. A third factor to the low level of risk, as measured by the VIX, is the fact that oil prices are remaining stubbornly low, despite the actions by OPEC to try to artificially increase the price of oil by lowering supply. With shale oil drilling in the US and the speed with which drillers can react to market movements in the price of oil, it looks like the US is becoming more immune to the actions of OPEC. A final factor in the low level of the VIX is a seasonal one; we are just about to enter the summer trading season when volume is lower than average and markets in general are less volatile than they are during other parts of the year. After briefly touching the multi-year low early last week, the VIX did recover some of the losses and managed to end the week with only a very slight decline for the week.

 

US news impacting the financial markets:

US news last week that impacted financial markets focused on three primary items. The first was the weakness seen coming from the US consumer, the second was President Trump’s firing of James Comey and the final was the continuation of earnings season. According to the World Bank’s latest data, consumer spending in the US accounts for 68.1 percent of total GDP, which is why consumer spending moving flat or going down can quickly become a big problem for the overall health of the economy. Retail sales have been trending down since April of 2015, as is depicted in the chart to the right. While the monthly data (bar charts at the bottom) can be very volatile, the blue squiggly line in the middle of the chart is more concerning because it shows that annual spending is down nearly three quarters of a percent. This decline in spending is likely what is keeping GDP growth here in the US so anemic. The biggest drivers of the decline in retail sales have been department stores, health and personal care and clothing and furniture. We have already started to see the impact of slower spending on department stores as there have been several well-known brands that have either filed for bankruptcy or will very likely need to file within the next few quarters. According to CNBC (chart to the left), so far in 2017 we have seen nine retail companies file for chapter 11 bankruptcy in just the first 3 months of the year. This clearly puts the retail sector on track to see more bankruptcies in 2017 than we saw at the height of the great recession in 2008 and 2009. Slower consumer spending is one of the reasons why Republicans want to pass tax reform. Their thinking is that if taxes are lowered, people will have more disposable income and be inclined to spend more. While this is a nice idea, it will be very difficult to parse the data and determine what the US consumer does with any tax savings, should they come. The second major topic last week of the financial markets was President Trump’s firing of FBI director Comey.

When news broke that President Trump had fired FBI Director Comey, the stock market saw an uptick in volatility as political turmoil was likely to follow. However, the reaction was muted as politicians from both sides of the aisle had said they lost faith in Comey following his handling of the Clinton e-mail debacle during the campaign. More concerning to the markets last week was the fact that even within the White House there seemed to be a very large amount of confusion about why Director Comey had been fired, with the story changing several times in rapid succession. Last week being a very slow week for news certainly had something to do with the amount of coverage given to the Comey ordeal and the story will likely be short lived once something else comes along and takes back the spotlight. Earnings season will not be the story line that takes the spotlight off Washington DC, however, as we are almost finished with the first quarter reporting season.

 

Last week was the final busy week (in terms of the number of companies reporting) of the first quarter earnings season. Below is a table of the well-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:

 

Axon Enterprises 133% JC Penney 71% SeaWorld Entertainment -25%
Sotheby’s 46% Jacobs Engineering 10% Symantec -75%
Blue Buffalo 5% Nordstrom 59% Time -80%
Dillard’s 7% Kohls 39% Toyota Motor 22%
Dean Foods -24% Macys -12% Tyson Foods -5%
Disney Walt 6% Nvidia 24% Hostess Brands -6%
Discovery Communications -16% News Corp 75% Valeant Pharmaceuticals 192%
Electronic Arts -5% Office Depot 33% Wendy’s 13%
Henry Schein 6% Priceline.com 12% Whole Foods Market 0%

 

Unlike the past few weeks, where it seemed like the table of corporate results held less colored squares than non-colored cells, this week seemed like companies either really beat expectations or really fell short. Retail stores had a difficult week, despite some of their reports being positive, after Macy’s announced its results, which missed expectations, and lowered its outlook. Kohl’s, Nordstrom, JC Penny and Dillard’s all beat expectations, which was good, but their forward guidance, if given, painted a less than desirable picture. Disney made waves last week as its amusement park business and movie divisions performed very well, but the positive performance did not carry over to ESPN, which struggled during the quarter thanks in large part to cable cord cutting by a meaningful number of consumers. One of the other big earnings announcements that didn’t make the table because I didn’t know if it would release earnings last week was Snapchat, which tanked off by nearly 25 percent following its earnings announcement that saw revenues and new users decline during the quarter. Time Inc, publisher of TIME magazine, Sports Illustrated and Fortune; saw a large decline in earnings when compared to expectations as subscribers declined faster than expected during the quarter. In consideration of having fewer subscribers, the company announced it would cut its dividend and undertake other spending cuts throughout the company. Valeant Pharmaceuticals released better than expected results, which in turn caused some of the large hedge funds that were shorting the stock to have to buy to close out their positions. This large institutional buying of the stock helped drive the stock price up more than 31 percent for the week.

 

According to Factset Research, we have seen 456 (91 percent) of the S&P 500 companies release their results for the first quarter of 2017. Of the 456 that have released earnings, 75 percent have beaten earnings estimates, while 7 percent have met expectations and 18 percent have fallen short of expectations. When looking at revenue, of the companies that have reported, 64 percent of the companies have beaten estimates, while 36 percent have fallen short. The overall earnings growth rate for the S&P 500 that we have seen thus far stands at 13.6 percent. If this growth rate holds through the end of the reporting season it will be the first time since 2011 that we have seen a double-digit growth rate on the S&P 500. So far, 90 companies have issued forward looking guidance for their companies with 61 companies issuing negative guidance, while 29 companies have issued positive guidance. The current forward 12-month PE ratio of the S&P 500 is 17.5, which is a bit higher than the 5-year average of 15.2.

 

This week is a continuation of the slowdown in the first quarter earnings season, which ultimately ends in about three weeks. Retailers will once again be the primary focus of earnings reports this week. The table below shows the companies that have the greatest potential to move the markets highlighted in green:

 

Applied Materials Dicks Sporting Goods Ross Stores
Alibaba Foot Locker Red Robin Gourmet Burgers
Buckle Gap Staples
Campbell Soup Home Depot Target
Salesforce.com Jack In The Box TJ Maxx
Cisco Systems L Brands Urban Outfitter
Deere & Co Ralph Lauren Wal-Mart Stores

 

All eyes this week will be on Wal-Mart, the world’s largest private employer, as it reports its first quarter results. Of interest to investors will be the gains, if any, in the online retail space that Wal-Mart may have seen during the quarter. Also, the curbside and delivery service could hold some interesting pieces of information about the future of the company. Target also reports earnings this week, but based on other retailers who have reported so far, it would not be surprising to see Target miss expectations as the chain continues to struggle with increasing foot traffic as well as online sales. Home Depot is always watched as a barometer for the overall health of the US housing market as many home owners shop regularly at Home Depot for projects to fix up their homes. According to the Spectrem Group, 57 percent of millionaires in the US with a net worth of more than $5 million shop and Home Depot regularly.

 

Global news impacting the markets:

 

There was not much news last week in the global media that impacted the financial markets. Newly elected French President Emmanuel Macron had a negligible impact on Europe and even on the French markets aside from a small bump on Monday last week following his largely expected victory over Marine Le Pen. After being sworn in yesterday, one of his first moves as President was to pick a Prime Minister and he picked centre-right leaning mayor Edouard Philippe in a break from the norm, going outside of his political party for the pick. There were two central bank meetings last week with both the Reserve Bank of New Zealand and the Bank of England announcing no changes in any of their policies or rates. This lack of a change from the two central banks was widely anticipated and had very limited impact on the markets. In China, there continues to be mounting fears that the financial system within the country could fail and have a large negative global impact. Lending in China is currently being curbed by the government to lower speculation by investors. However, as the government cracks down on bad lending, a shadow banking and lending market has sprung up. This shadow system is now accounting for a significant amount of money and will be very difficult for the government to regulate. This is potentially creating a bubble that the government in China does not have the ability to contain and could lead to significant problems in the future. Investors are clearly worried as they have pushed down the Shanghai composite index for five weeks in a row and it does not look like they will be letting up pressure on the index any time soon.

 

Technical market review:

 

There were no adjustments needed on the charts below over the course of the previous week. The green lines remain the daily index movements, while the yellow lines are the same trading ranges that have been drawn for the past several weeks. The red line on the VIX chart remains the 52-week average level of the VIX.

The NASDAQ (lower left pane above) remains the strongest of the three major indexes as it is significantly above its most recent trading range. The S&P 500 (upper left pane above) is currently in second place in terms of technical strength as the index managed to stay just above the upper end of its trading range last week. The Dow (upper right pane above) failed to stay above its most recent trading range, falling back down into the range and finishing the week last week in the upper quarter of the range. The VIX (lower right pane above) had a monumental week. After briefly hitting the lowest point that we have seen since December of 1993 on Monday, the index bounced up toward the end of the week, ending little changed, but still at a very low level when compared to the past week.

 

Hybrid model performance and update

For the trading week ending on 5/12/2017, returns in the hybrid and quant hypothetical models* (net of a 1% annual management fee) were as follows:

 

  Last Week 2017 YTD Since 6/30/2015
Aggressive Model -0.65% 3.44% 8.97%
Aggressive Benchmark 0.08% 8.04% 7.84%
Growth Model -0.54% 3.34% 7.98%
Growth Benchmark 0.06% 6.26% 6.41%
Moderate Model -0.41% 2.93% 6.66%
Moderate Benchmark 0.05% 4.49% 4.87%
Income Model -0.34% 2.87% 6.40%
Income Benchmark 0.03% 2.33% 2.81%
Quant Model -0.47% 9.37%
S&P 500 -0.35% 6.79% 15.89%

*Model performance does not represent any specific account performance but rather a model of holdings based on risk levels that are like my actual holdings, the hypothetical models are rebalanced daily to model targets.

 

There was one change to the hybrid models over the course of the previous week and that was the addition of a new ETF to the models. The ETF that was purchased is the Powershares Dorsey Wright and Associates (DWA) Technical leader’s ETF (PDP). The fund invests in the companies that are the strongest in terms of technical strength as measured by relative strength derived from the DWA point and figure methodology. As the markets have settled into the reality of President Trump, there have been some trends emerging in different stocks that could prove to be long term uptrends. Rather than purchasing a few of these trends and trying to pick out which ones will continue, this fund invests in the top 100 trends and does so in a very cost effective and efficient way. The fund can also be bought and sold at Schwab with no trading commission to Schwab and there is no required holding period, meaning if the trends start to break down, it can be sold very quickly. The purchase was a partial position and we will be looking to add to the investment in the future if it continues to perform as expected.

 

Market Statistics:

 

Last week was a mixed week for the US financial markets as the NASDAQ managed to turn in a positive gain, while both the S&P 500 and the Dow declined:

 

Index Change Volume
NASDAQ 0.34% Average
S&P 500 -0.35% Below Average
Dow -0.53% Average

 

Now that we are so close to the end of first quarter earnings season, it was not surprising to see that volume was either average or below average on the three major indexes last week. As we move more into the summer trading season, we should see volume continue to decrease. This decrease in volume is partly what makes the summer trading season volatile for stocks as there are fewer buyers for stocks. When something sparks, what would otherwise be a small sell-off becomes more pronounced; prices decline more than they otherwise would when there are fewer people willing to step in and buy.

 

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 3.39%   Broker Dealers -1.43%
Commodities 1.99%   Regional Banks -1.73%
Oil & Gas Exploration 1.55%   Insurance -1.77%
Technology 1.18%   Transportation -2.00%
Pharmaceuticals 0.74%   Global Real Estate -2.17%

 

With the NASDAQ turning in a positive week and oil advancing by 3 percent, it was not surprising to see that the sectors that performed the best last week were in either of those two spaces. Semiconductors turned in the top performance of the week last week, thanks to the earnings report from NVidia, which handily beat Wall Street’s expectations and sent the stock up more than 28 percent for the week. Within the semiconductor index, NVidia has a relatively high weighting, so that large of an increase boosted the entire index. Commodities and Oil and Gas Exploration took the second and third spots on the list last week as both rode the increasing price of oil. Technology overall was driven by NVidia earnings as well as a few other major technology companies’ earnings and was high enough to move into the fourth spot. Pharmaceuticals took the fifth and final spot on the sector performance list, driven mainly by an earnings beat of 192 percent by Valeant Pharmaceuticals as the company continues to perform well despite being the most hated stock by hedge funds. On the negative side, Global Real Estate and Transportation took the bottom two spots as investors seemed to be selling these two areas of the market in favor of moving into more technology focused investments. After strong earnings being reported by the financial sector, last week was time for some of those gains seen over the past two weeks to be given back; investors sold some of their profits, driving down Insurance, Regional Banks and Financial Broker Dealers.

 

The US government fixed income securities had an interesting week last week as all three areas of the curve increased, but it was the middle of the curve that saw the greatest increase. This is an unusual phenomenon as either the long or the short end of the curve is typically the best performing, with the middle of the curve seeing the in-between performance.

 

Fixed Income Change
Long (20+ years) 0.08%
Middle (7-10 years) 0.19%
Short (less than 1 year) 0.02%
TIPS 0.02%

Global currency trading volume was above average last week as traders from around the world got back to work after the many holidays that occurred around the world. Overall, the US dollar advanced 0.63 percent against a basket of international currencies. The best performing of the global currencies last week was the Brazilian Real, as it gained 1.8 percent against the value of the US dollar. The worst performance among the global currencies was the Swiss Franc, with a decline of 1.4 percent against the US dollar for the week.

Commodities were mixed last week, as Oil finally saw a week of advancement:

Metals Change   Commodities Change
Gold -0.15%   Oil 3.00%
Silver 0.45%   Livestock 1.29%
Copper -0.42%   Grains -0.90%
      Agriculture 0.95%

The overall Goldman Sachs Commodity Index advanced 1.99 percent last week. Oil contributed to a large part of the increase in the overall commodity index as it gained 3 percent. Much of the oil increase was due to continued rumbling coming out of OPEC that seems to point to an extension of the production cuts that were agreed to late last year. Even Russia seems to be signaling that the country is okay with extending the production cuts through March of 2018 to try to boost oil prices. Metals were mixed last week with Gold and Copper falling 0.15 and 0.42 percent; respectively. Silver bucked the trend and increased by 0.45 percent during the week. Soft commodities were mixed last week with Agriculture gaining 0.95 percent, while Livestock advanced 1.29 percent and Grains posted a loss of 0.90 percent.

Top 2 Indexes Country Change   Bottom 2 Indexes Country Change
BUX Hungary 4.78%   SET Thailand -1.60%
Sao Paulo Bovespa Brazil 3.82%   IBEX 35 Spain -2.14%

Last week was a good week for global financial markets with 69 percent of the markets posting gains. The best performing index last week was found in Hungary, as the BUX Index turned in a gain of 4.78 percent for the week. The worst performing index last week was found in Spain and was the IBEX 35 Index, which turned in a loss of 2.14 percent as the country continues to struggle with high unemployment as well as a major drought affecting large areas of the country.

As mentioned earlier in this commentary, the VIX briefly touched the lowest point that we have seen since December of 1993 last week before moving up slightly toward the end of the week, closing little changed overall for the week. There are many theories about why the VIX is so low, but one that stood out was that investors no longer need to hedge their investments with futures the way they used to now that there are so many ways to hedge against losses. Investors can be much more specific about what they are hedging than just a broad index, which is what the VIX measures. So, while the usefulness of the VIX has not entirely gone away, it could be slightly diminished. The current reading of 10.40 implies that a move of 3.00 percent is likely to occur over the next 30 days. As always, the direction of the move over the next 30 days is unknown.

Economic Release Calendar:

 

Last week was a slow week for economic news releases in terms of number and also in terms of the likelihood of market reaction to any of the releases, which is not anticipated:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Slightly Positive 5/11/2017 PPI April 2017 0.5% 0.2%
Neutral 5/11/2017 Core PPI April 2017 0.4% 0.2%
Neutral 5/12/2017 CPI April 2017 0.2% 0.2%
Neutral 5/12/2017 Core CPI April 2017 0.1% 0.2%
Slightly Negative 5/12/2017 Retail Sales April 2017 0.4% 0.7%
Slightly Negative 5/12/2017 Retail Sales ex-auto April 2017 0.3% 0.6%
Neutral 5/12/2017 University of Michigan Consumer Sentiment Index May 2017 97.70 96.50

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

 

Last week the economic news releases started on Thursday with the release of the Producer Price Index (PPI) for the month of April, which showed that overall prices at the producer level increased at a slightly faster pace than was anticipated. Core PPI prices were also shown to have increased at a slightly faster pace than anticipated. On Friday, the Consumer Price Index (CPI) for the month of April was released and unlike the PPI earlier, the CPI came in as expected with 0.2 percent inflation during the month overall, but only 0.1 percent when looking at core CPI. Taken in aggregate, the PPI and CPI numbers point toward a US economy that is currently experiencing very low inflation, despite all the Fed stimulus of the past few years that one would think would boost inflation. Lack of inflation looks like it will be persistent in the current economy, which could ultimately make the Fed’s decision about raising rates more difficult. Also released on Friday were the retail sales figures for the month of April, which came in weaker than anticipated with overall sales increasing 0.4 percent and retail sales excluding auto sales increasing only 0.3 percent. Both retail sales figures were relatively weak and do not point to an economy that will see a significant increase in GDP growth should they remain so low.

 

This is a very slow week for economic news as two early indicators of manufacturing in the US for the month of May are the only significant releases of the week:

 

Date Release Release Range Market Expectation
5/15/2017 Empire Manufacturing May 2017 7.50
5/16/2017 Housing Starts April 2017 1255K
5/16/2017 Building Permits April 2017 1270K
5/18/2017 Philadelphia Fed May 2017 18.5

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

 

This week’s economic news releases start on Monday with the release of the May reading for the Empire Manufacturing index, which is expected to be slightly higher (7.5 for a reading) than the 5.2 reading for April. If this comes to fruition it would signal that manufacturing in the greater New York area picked up during the month at a faster pace than was expected. On Tuesday, the first of the housing related releases for the month of April are set to be released with the housing starts and building permit figures for the month. Neither of these two releases should have any noticeable impact on the overall markets if they come in relatively close to the expected 1.2 million unit level. This week wraps up on Thursday with the release of the Philadelphia Fed Index for the month of May. The index is expected to show a slight slowdown to 18.5 from the May reading of 22. There are no scheduled Fed speeches this week, which takes one potentially market moving catalyst off the table for the week.

 

Interesting Fact 10 years is a long time for an FBI director

 

With last week’s unexpected firing of FBI Director James Comey, this week’s interesting fact looks at the tenure of previous directors of the FBI to see if they typically serve all 10 years of their term or not. The following graphic is from Statista and shows all 6 FBI directors since 1973, along with their tenure:

As you can see, in this group of 6 there was only a single director of the FBI that made it 10 years and beyond: Robert Mueller, from 2001 to 2013. Prior to Clarence Kelley in 1973, J Edgar Hoover was the Director of the Bureau of Investigations (which turned into the FBI) from 1924 until 1972, a 48 year stretch.

For a PDF version of the below commentary please click here Weekly Letter 5-8-2017

Commentary quick take:

 

  • Major developments:
    • Markets continued to push higher
    • Earnings season keeps improving
    • Healthcare reform passed the House
    • Macron won the second round of the French election

 

  • US:
    • US budget for the next 5 months was passed, avoiding shutdown
    • Healthcare reform passed in the House
    • No change in rates from May FOMC meeting
    • First Quarter earnings
      • Strongest growth rate since 2011
      • 83 percent complete
      • Earnings growth rate currently at 13.5 percent
    • Labor markets continues to show strength

 

  • Global:
    • France has elected Emmanuel Macron as President
    • Populist wave once again came up short
    • Brexit negotiations will be very difficult

 

  • Technical market view:
    • All three indexes above trading ranges
    • VIX touched lowest point of the past year

 

  • Hybrid investments strategy update:
    • No changes last week
    • Earnings season continues to be mixed
    • Rumors of General Mills buyout

 

  • This week for the markets:
    • Congress in recess
    • Summer trading seems to be starting early
    • North Korea

 

  • Interesting Fact: Food is big money

 

Major theme of the markets last week: May has officially started

 

Last week was a slow week in the markets. Earnings season moved ahead, a few items were accomplished in Washington DC and the result of the presidential election in France came as no surprise. Looking ahead, we have started the month of May, which according to an old investing adage is a month to sell and go away.

 

There was a good research piece released by Dimitri Speck on acting-man.com last week that looked at the “sell in May and go away, come back after Labor Day” trading theory. He calculated what is well known: summer months generally produce lower returns than winter months in many different countries. He looked at 9 different major countries around the world and concluded that the markets experienced a loss of 1.1 percent on average during the summer months, whereas the winter months saw an average return of 8.65 percent. There are many theories about why this returns dispersion occurs, but no one knows for sure. One sensible theory is that winter months typically see a run up toward the holiday shopping season followed by the actual results of the holiday season. Whatever the reason, summer is clearly a tough time for stocks.

 

US news impacting the financial markets:

 

Last week was a busy week here in the US financial media. There were actions taken on Capitol Hill, the May FOMC rate meeting and a slew of corporate earnings releases. With Congress in session last week for the second week in a row and a scheduled recess starting this week, it was crunch time in DC to get things passed. A budget was passed last week that funds the US government through the end of September 2017. President Trump was unhappy that may of his priorities were absent from the budget. He even went as far as saying that come September the government needs a good shutdown. In line with President Trump’s aims, he managed to get healthcare reform pushed through the House of Representatives on a very narrow vote. However, the vote was taken before much analysis could be done and the CBO had not yet released its impact projections. The bill moves to the Senate where even Republicans acknowledge it is dead on arrival. Republicans have said they will write their own bill, but it will likely turn out to be nothing close to what passed in the Senate. On the tax front, no new information was released by the administration or anyone else regarding the proposed tax law changes. In addition to the meetings and events on Capitol Hill, the Federal Reserve held its May FOMC meeting.

 

Going into the May FOMC meeting, there was virtually no chance of the Fed raising rates at the meeting. As expected, rates were left unchanged. There were very few changes in the statement. One key line addressed both weakness in the first quarter GDP figure and the 2 percent target inflation rate: “The Committee views the slowing in growth during the first quarter as likely to be transitory and continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, labor market conditions will strengthen somewhat further, and inflation will stabilize around 2 percent over the medium term.” The statement also noted that the risks to the US economy were “balanced.” While there were no immediate changes in the expected future movements by the Fed following the conclusion of the meeting, we saw a big uptick in expectations on Friday following the release of very strong employment figures, discussed below. The chart to the right shows the latest Fed watch figures for the odds of a rate hike at each of the next four meetings of the FOMC. As you can see, the odds have greatly increased.

 

Last week was the busiest week (in terms of the number of companies reporting) of the first quarter earnings season. Below is a table of the well-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:

 

Apple 4% CenturyLink -2% Merck & Co 6%
Aetna 15% CVS Health 6% National Cinemedia -60%
AIG 23% Dish Network 13% Owens & Minor -2%
Allstate 58% Dunkin Brands 13% Pfizer 3%
Advanced Micro Devices 0% Callaway Golf 36% Papa Johns 3%
Arrow Electronics 1% Energizer 47% Ferrari 0%
Alibaba Group pushed Facebook 18% Revlon 0%
Ball 10% Fitbit 0% Sprint -75%
Bp 21% Hyatt Hotels 204% Sprouts Farmers Markets 14%
Berkshire Hathaway -16% Herbalife 43% Shake Shack 25%
Anheuser-bush 0% Jack Henry 7% Molson Coors -42%
Cabela’s 11% Kellogg 5% Tesla -194%
Cardinal Health 5% Kraft Heinz -1% Time Warner 15%
Cheesecake Factory -1% MasterCard 7% Texas Roadhouse 3%
Avis Budget -84% Mondelez 6% Wing stop 47%
Church & Dwight 13% MetLife 15% Aqua America -3%
Clorox 1% MoneyGram 40% Western Union -13%
ConocoPhillips -300% Altria Group -1% Zillow Group 70%

 

The two companies that missed expectations by the widest margins in terms of percentages last week were ConocoPhillips (COP) -300 percent and Tesla (TSLA) -194 percent. COP looks worse than it actually is because the company was expected to post a 1 cent gain for the quarter and instead posted a 2 cent loss. Any time earnings expectations are close to zero and the company releases something different than expected, the percentage either below or above turns into a very large number. TSLA, on the other hand, missed earnings expectations by a wide margin, despite significant losses being expected going into the quarter. Vehicle production numbers were weak during the first quarter and the company is still banking on the new Model 3 as being the car that saves the company. Apple also posted results last week, but there was not much to the release, as the company sold fewer iPhones than expected, but saw other business lines perform very well, leading the overall earnings for the quarter to be slightly better than anticipated. Facebook solidly beat market expectations as the company neared its 2 billionth user during the first quarter of 2017, while enjoying profits of $1 billion per month. Car rental company Avis Budget missed expectations last week as the ride sharing companies such as Uber and Lyft continue to take market share away from the car rental industry.

 

According to Factset Research, we have seen 416 (83 percent) of the S&P 500 companies release their results for the first quarter of 2017. Of the 416 that have released earnings, 75 percent have beaten earnings estimates, while 7 percent have met expectations and 18 percent have fallen short of expectations. When looking at revenue, of the companies that have reported, 66 percent of the companies have beaten estimates, while 34 percent have fallen short. The overall earnings growth rate for the S&P 500 that we have seen thus far stands at 13.5 percent. This is an increase of 1 percent from last week’s 12.5 percent reading. If this growth rate holds through the end of the reporting season it will be the first time since 2011 that we have seen a double-digit growth rate on the S&P 500. Being more than 80 percent complete, in terms of the percentage of companies reporting earnings, we are getting to the point where it becomes difficult statistically for the above-mentioned numbers to materially change.

 

This week is the start of the slowdown in the first quarter earnings season as more than three quarters of the component companies in the S&P 500 have already reported their results. Following this week’s releases, we will have seen more than 90 percent of the S&P 500 component companies report their results. The table below shows the companies that have the greatest potential to move the markets highlighted in green:

 

Axon Enterprises Jack In The Box Priceline.com
Sotheby’s JC Penney SeaWorld Entertainment
Blue Buffalo Jacobs Engineering Symantec
Dillard’s Nordstrom Time
Dean Foods Kohls Toyota Motor
Disney Walt Macys Tyson Foods
Discovery Communications Nissan Hostess Brands
Electronic Arts NVidia Valeant Pharmaceuticals
First Data News Corp Wendy’s
Henry Schein Office Depot Whole Foods Market

 

Retail companies will start to become the focus over the next few weeks of earnings releases as these companies are typically some of the slowest to report earnings due to the nature of their businesses. This week we should get a good idea of the type of retail clothing stores that did or did not do well during the quarter as high end companies such as Nordstrom and Macy’s report results, as well as lower end stores such as Kohl’s and JC Penney. Whole Foods Market also reports earnings this week as the company continues to try to change its image of being over priced for the average American to shop at. Disney reports results this week and, as always, there are two primary drivers of results for the company: theme parks and media. Moana, released in late November of 2016, could have a noticeable impact on the first quarter results as the movie turned out to be more successful than was initially anticipated.

 

Global news impacting the markets:

 

There were several holidays celebrated around the world last week, leading to numerous market closures and a decrease in the amount of global news that impacted the financial markets. North Korea made very few headlines and the rhetoric coming out of the hermit kingdom seems to have slowed. The biggest headlines last week surrounded the anticipated win by presidential candidate Emmanuel Macron in the second round of the French elections that took place on Sunday. Macron won by a count of 66 percent to Le Pen’s 34 percent, with most of the polling numbers having been turned in and counted. The result of the election should not have any noticeable impact on the market movement this week as it was widely anticipated. Among European headlines last week, Brexit also made a few waves.

 

The Brexit talks made headlines last week following a leaked report about a meeting between UK PM Theresa May and European Commission President Juncker on Wednesday over dinner. PM May put the meeting in a positive light, but the leaked report quoted Juncker as saying she was “deluded” and that the talks would “more likely than not” fail. One of the sticking points was that PM May thought she would be able to simultaneously negotiate both the British exit from the EU and the post-Brexit trade deal with the EU. However, the EU seems to be taking the hard line, saying that the Exit talks must come first and be independent of trade talks. This will be a problem for the UK as the exit talks will have to include a few large payments of money, £50 billion in total, a so called “divorce bill” to the EU. This is widely unpopular within the UK and will be a major sticking point with the EU. According to the article printed in Germany, which May is saying is nothing but gossip, PM May went into the meeting with a “let us make Brexit a success” attitude and was met with a “this cannot be a success” attitude from Juncker. However the meeting went, it is clear that the two sides are miles apart on how the Brexit negotiations will move forward. In the end, the EU hand is very strong as there are 27 countries all working for one goal against one country that wants to get everything it would like. Time is also on the side of the EU as the two-year clock is already counting down and, much like Cinderella at the stroke of midnight, the magical union between the UK and the EU ends with or without a deal. An extension of the negotiations of the Brexit cannot be done, nor can the agreement of the UK leaving be undone at this point.

 

Technical market review:

 

With the gains last week on the three major US indexes, all three of the indexes are now above their most recent trading ranges. The green lines remain the daily index movements, while the yellow lines are the same trading ranges that have been drawn for the past several weeks. The red line on the VIX chart remains the 52-week average level of the VIX.

The NASDAQ (lower left pane above) remains the strongest of the three major indexes as it is significantly above its most recent trading range. The S&P 500 (upper left pane above) is currently in second place in terms of technical strength as it is a little more above the upper end of its trading range than the Dow (upper right pane above). The VIX (lower right pane above) had an interesting week. After briefly hitting the lowest point that we have seen over the past year, the index bounced up toward the end of the week, ending little changed, but still at a very low level when compared to the past.

 

Hybrid model performance and update

For the trading week ending on 5/5/2017, returns in the hybrid and quant hypothetical models* (net of a 1% annual management fee) were as follows:

 

Last Week 2017 YTD Since 6/30/2015
Aggressive Model 0.49% 4.11% 9.69%
Aggressive Benchmark 0.79% 7.95% 7.75%
Growth Model 0.36% 3.90% 8.57%
Growth Benchmark 0.62% 6.19% 6.35%
Moderate Model 0.23% 3.36% 7.11%
Moderate Benchmark 0.44% 4.44% 4.82%
Income Model 0.12% 3.21% 6.77%
Income Benchmark 0.23% 2.30% 2.79%
Quant Model 0.51% 9.89%
S&P 500 0.63% 7.70% 17.50%

*Model performance does not represent any specific account performance but rather a model of holdings based on risk levels that are like my actual holdings, the hypothetical models are rebalanced daily to model targets.

 

 

There were no changes to the hybrid models over the course of the previous week. During the week last week, we saw several of the equity holdings in the models report earnings with some companies beating expectations (Jack Henry and Church and Dwight), while others (Owens and Minor and Aqua America) fell a little short. The big move of the week within the models came from General Mills on Thursday when there was a rumor that the company could be bought out by a private equity group out of Brazil, whom Warren Buffett has done deals with in the past. GIS increased by more than 12 percent in a matter of minutes, only to give some of the gains back before the close. This is not the first time that rumors of a buyout surrounding General Mills have surfaced, and with the new change in leadership at the CEO position, we could see more renewed interest in the company being sold in the near term.

 

Market Statistics:

 

The bull run continued last week as the three major US equity indexes pushed higher for the week:

 

Index Change Volume
NASDAQ 0.88% Average
S&P 500 0.63% Average
Dow 0.32% Average

 

Volume last week here in the US was average as there were several market closures around the world that could have had a small impact on volume. The primary drivers of performance last week were earnings reports and items being checked off of the Trump agenda in Washington DC.

 

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 2.25% Oil & Gas Exploration -1.30%
Software 2.03% Pharmaceuticals -1.71%
Financials 1.86% Global Real Estate -1.96%
Industrials 1.63% Commodities -2.70%
Infrastructure 1.63% Telecommunications -4.23%

 

Sectors directly tied to President Trump’s agenda made up 4 of the top 5 performing sectors of the markets last week, with Healthcare Providers increasing the most, thanks to the dropping of the preexisting conditions mandate in the Healthcare reform bill that was passed last week. With Healthcare “getting done,” even if it is a very long way from becoming law, the markets jumped on the other areas the administration could positively impact and drove up sectors such as Financials, Industrials and Infrastructure. Software is the outlier in the top 5 performing groups as the sector enjoyed strong results from companies such as Facebook during the week, which helped drive the strong overall performance. On the negative side of sector performance last week, there was a mix of sectors with earnings and commodities price declines driving most of the downside. Sprint made up most the losses in the Telecommunications sector last week after the company missed earnings expectations by 75 percent; the stock slumped by more than 10 percent on the following day. Pharmaceuticals were down on the passing of the healthcare reform bill as it looks like the pricing of drugs could come under even more political scrutiny.

 

Fixed income markets here in the US moved lower following the Fed statement and the increased likelihood of future rates hikes at the upcoming FOMC meetings. Following the labor markets data last week, the yields on fixed income here in the US increased, as expected. This is a notable change from what has been recently occurring in the fixed income market, with traders not believing that the Fed will actually be able to raise rates in the near term.

 

Fixed Income Change
Long (20+ years) -0.87%
Middle (7-10 years) -0.57%
Short (less than 1 year) -0.05%
TIPS -1.10%

Global currency trading volume was below average due to holidays last week. Overall, the US dollar declined 0.47 percent against a basket of international currencies. The best performing of the global currencies last week was the Croatian Kuna, as it gained 1.4 percent against the value of the US dollar. The worst performance among the global currencies was the Russian Ruble, with a decline of 1.9 percent against the US dollar for the week.

Commodities were mixed last week, as soft commodities moved higher, while metals and oil pushed lower:

Metals Change Commodities Change
Gold -3.11% Oil -5.66%
Silver -4.91% Livestock 2.19%
Copper -2.87% Grains 1.97%
Agriculture 1.27%

The overall Goldman Sachs Commodity Index declined 2.7 percent last week. Oil declined by 5.66 percent for the week as global supplies just keep building, while demand seems to be moving slightly lower. The recent downward movement in the price of oil seems to be much more about demand than oil production as production has not changed very much relative to how much prices have come down. Metals were down last week with Gold, Silver and Copper falling 3.11, 4.91 and 2.87 percent; respectively. Soft commodities advanced last week with Agriculture gaining 1.27 percent, while Livestock advanced 2.19 percent, giving the livestock a 2 week change of more than 10 percent, and Grains posted a gain of 1.97 percent.

Top 2 Indexes Country Change Bottom 2 Indexes Country Change
PSI 20 Portugal 4.39% Shanghai Composite China -1.64%
FTSE MIB Italy 4.24% RTS Index Russia -2.58%

Last week was a good week for global financial markets as 71 percent of the markets posted gains over the course of the week. The best performing index last week was found in Portugal (not Venezuela for a change), as the PSI 20 turned in a gain of 4.39 percent for the week. The worst performing index last week was found in Russia and was the RTS Index, which turned in a loss of 2.58 percent as allegations of Russian meddling in both the US and now the French elections continue to put political pressure on the country.

Following the decline of more than 26 percent on the outcome of the first round of the French election two weeks ago, the VIX continued to push lower last week, falling 2.31 percent. With most of the next 30 days looking like smooth sailing into the summer trading season, the VIX is very low and looks set to stay there. The current reading of 10.57 implies that a move of 3.05 percent is likely to occur over the next 30 days. As always, the direction of the move over the next 30 days is unknown.

Economic Release Calendar:

 

Last week was a typical week for economic news releases and there were releases that both missed and beat expectations. The release that missed the most last week is highlighted in red below, while the release that beat expectations by the most is highlighted in green:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Neutral 5/1/2017 Personal Income March 2017 0.20% 0.30%
Negative 5/1/2017 Personal Spending March 2017 0.00% 0.10%
Slightly Negative 5/1/2017 PCE Prices – Core March 2017 -0.10% 0.00%
Neutral 5/1/2017 ISM Index April 2017 54.8 56.5
Neutral 5/3/2017 ADP Employment Change April 2017 177K 170K
Neutral 5/3/2017 ISM Services April 2017 57.5 55.8
Neutral 5/3/2017 FOMC Rate Decision May 2017 No Change No Change
Neutral 5/5/2017 Nonfarm Payrolls April 2017 211K 180K
Neutral 5/5/2017 Nonfarm Private Payrolls April 2017 194K 175K
Positive 5/5/2017 Unemployment Rate April 2017 4.40% 4.60%

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

 

Last week the economic data releases started on Monday with the release of personal income and spending as income came in near expectations, while spending missed and came in flat. This lack of spending is really starting to be apparent on the part of the US consumer and will likely start to be seen in the GDP figures if it becomes more persistent in the future. PCE prices, the choice measure of price inflation for the Fed, printed a negative reading on Monday and signaled that price deflation could be starting in the US economy. While this is just a single data point, it will make next month’s PCE print very important so that a trend of declining prices does not start for the coming summer months. The ISM index released later during the day on Monday came in as expected with an increase in manufacturing activity during the month of April in the US. On Wednesday, as mentioned above, there was no change announced after the FOMC’s May meeting. The ADP employment change figure released earlier in the day on Wednesday came in close to market expectations and did not signal any change needed in expectations for the labor numbers to be released on Friday. On Friday, the government released a trove of labor market related information with nearly all the data pointing toward a strengthening US labor market. The overall unemployment rate fell to 4.4 percent, the lowest point that we have seen since prior to the Great Recession. Payroll numbers got back on track during April, following dismal March readings, and the labor force participation rate moved lower by only one tenth of a percent. Average hourly earnings increased during April as did average hours worked. Overall the data in aggregate that was released about the US employment situation painted a positive picture and in doing so pushed up the odds of a rate hike at the next FOMC meeting, which is held in June.

 

 

This is a pretty slow week for economic news as retail sales and inflation related figures are about all that are being released:

 

Date Release Release Range Market Expectation
5/11/2017 PPI April 2017 0.2%
5/11/2017 Core PPI April 2017 0.2%
5/12/2017 CPI April 2017 0.2%
5/12/2017 Core CPI April 2017 0.2%
5/12/2017 Retail Sales April 2017 0.7%
5/12/2017 Retail Sales ex-auto April 2017 0.6%
5/12/2017 University of Michigan Consumer Sentiment Index May 2017 96.50

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

 

This week the economic news releases start on Thursday with the release of the Producer Price Index (PPI) for the month of April, which is expected to show overall producer prices to have increased by 0.2 percent, which is the same amount that core prices are expected to have increased. Consumer Prices (CPI) are set to be released on Friday and are also expected to print 0.2 percent gains on both overall prices and on the core price index. Retail sales will likely over shadow the CPI release on Friday as retail sales play a much bigger role in the overall US economy. Sales are expected to have increased by 0.7 percent overall, which would be a positive development, given the decline of 0.3 percent that was seen during March. Excluding auto sales, retail sales are expected to post an increase of 0.6 percent, which would also be an improvement when compared to the 0.2 percent reading seen in March. This week wraps up with the release of the first estimate for May on the University of Michigan’s Consumer sentiment index, which is expected to show almost no change over the level seen at the end of April. Additionally, this week there will be nine speeches by Federal Reserve officials. With little new information expected from any of them, the markets will be casually watching for clues in the speeches about when the next rate hike is likely to occur.

 

Interesting Fact Global food industry is very big money

Considering the rumored buyout of General Mills last week (discussed in the model performance section of this report), this week I looked at the global food industry (valued at $8 trillion) and found some interesting numbers.

The above graphic shows how just 10 large multinational food companies control most the global food industry. In total, the 10 companies see $1.1 billion in sales every day, which boils down to $12,731 in sales around the world every second of every day!

 

Source: www.behindthebrands.org, calculations are my own

For a PDF version of the below commentary please click here Weekly Letter 5-1-2017

Commentary quick take:

 

  • Major developments:
    • Markets jumped on first round of French elections
    • Earnings season picking up steam
    • Trump tax reform unveiled
    • Budget expansion (1 week) agreed to on Capitol Hill

 

  • US:
    • Congress is back in session
    • Trump’s 100 days ends without much fanfare
    • First Quarter earnings
      • Strongest growth rate since 2011
      • 58 percent complete
      • Energy is largest positive contributor

 

  • Global:
    • Trade war with Canada
    • French election speculation
    • North Korea pressure is building

 

  • Technical market view:
    • NASDAQ jumped out of the trading range
    • S&P 500 and Dow at the upper end of their trading range
    • VIX dropped by more than 25 percent
    • VIX at the lowest point in more than a year

 

  • Hybrid investments strategy update:
    • No changes last week
    • Earnings season is mixed

 

  • This week for the markets:
    • FOMC May meeting
    • Budget bill in Congress
    • Healthcare reform once again on the table
    • North Korea
    • Second round of the French election

 

  • Interesting Fact: Apple’s cash

 

Major theme of the markets last week: Earnings growth rate sky rocketed

US earnings continued to drive many of the gains seen in the US markets last week, aside from the one time bump due to the election results from France. The earnings growth rate that we have seen so far for the first quarter of 2017 is very impressive. As shown in the chart above going into the quarter, expectations were for earnings on the S&P 500 to have increased by 12.5 percent, but as we got into reporting, expectations came down to about 9 percent. However, following the start of the major oil companies reporting their actual results about a week ago, we have seen the earnings growth rate sky rocket higher. Currently, if a few more of the major oil companies turn in results like we saw last week from Exxon, the earnings growth rate could easily push over 13 percent for the quarter, which would be the fastest earnings growth rate that the US has seen since 2011.

 

US news impacting the financial markets:

 

Congress was back in session last week, but the primary driver of market performance last week continued to be corporate earnings reports. Last week was the busiest week (in terms of the number of companies reporting) of the first quarter earnings season. Below is a table of the well-known companies that released earnings last week, with earnings that missed expectations highlighted in red, while earnings that beat expectations by more than 10 percent are highlighted in green:

 

Alcoa 15% Alphabet 0% Raytheon 7%
American Airlines 7% Goodyear Tire 17% Starbucks 0%
Aflac 3% Halliburton 33% Six Flags 5%
Arthur J Gallagher 3% Hershey 4% Simon Property -1%
Amazon.com 44% Intel 2% Skyworks 2%
Anthem 22% JetBlue 4% Stryker 4%
AptarGroup 3% J&J Snack Foods -4% At&t 0%
Boeing 5% Kimberly Clark 2% T-Mobile 31%
Bristol-Myers 17% Coca Cola -2% TransUnion 6%
Caterpillar 106% Lockheed Martin 9% Tractor Supply 0%
Colgate-Palmolive 2% Southwest Air -2% Twitter 69%
Comcast 20% Las Vegas Sands 6% Texas Instruments 7%
Chipotle 25% McDonald’s 11% Under Armour 75%
Canadian National Railway 5% 3m Co 4% UBS 0%
Cube Smart 0% Microsoft 6% United Technologies 6%
Chevron 66% Newmont Mining 9% V F Corp 0%
Daimler 2% Northrop Grumman 25% Western Digital 12%
Dow Chemical 5% Pepsi 3% Whirlpool -6%
Dr Pepper Snapple 5% Procter & Gamble 2% Waste Management 0%
Ford Motor 15% Panera Bread -1% Weyerhaeuser 22%
Fiat Chrysler 12% Public Storage -4% Xcel Energy -6%
General Dynamics 7% Phillips 66 1767% Exxon Mobil 12%
General Motors 17% PayPal 9% Xerox -6%

 

Last week the focus of earnings reports was on two very different areas of the markets: big technology as well as industrials and energy. Big technology companies were led higher by the results of Amazon, which beat expectations by 44 percent, which is unusual given how large the company is and how many analysts follow and provide estimates on the company’s earnings. Microsoft turned in a good quarter as well, beating expectations by 6 percent. Google came in at analyst expectations as the company is very transparent in its earnings forecasts and there are typically very few large surprises. Industrials and energy companies provided some of the largest surprises last week as Phillips 66 beat expectations by more than 1,700 percent, which has more to do with earnings expected to be very close to zero than anything else. Chevron, Halliburton and Exxon all also reported their results last week and beat expectations (which were very high) during the first quarter. When looking at industrials, Caterpillar, Alcoa and General Motors all easily beat expectations on strong order growth coming from a wide variety of industries. The largest companies of the defense contractors reported earnings this week as well. McDonald’s turned in a very good quarter as the company continues to make changes to its business model with actions such as fresh, never frozen beef in one of its burgers and a wide variety of changes to its menu and customer experience. The Trump bump seems to have positively impacted the group as a whole as conflict does not seem to be ending anywhere in the world under the new US administration.

 

According to Thomson Reuters, we have seen 290 (58 percent) of the S&P 500 companies release their results for the first quarter of 2017. Of the 290 that have released earnings, 77 percent have beaten earnings estimates, while 9 percent have met expectations and 14 percent have fallen short of expectations. When looking at revenue, of the companies that have reported, 68 percent of the companies have beaten estimates, while 32 percent have fallen short. The overall earnings growth rate for the S&P 500 that we have seen thus far stands at 12.5 percent, as energy has really been turning in some very strong numbers, as was expected. If this growth rate holds through the end of the reporting season it will be the first time since 2011 that we have seen a double-digit growth rate on the S&P 500.

 

This week is the second busiest week of the earnings season with more than 1,300 companies reporting their first quarter results. Following this week’s results, we will have seen more than 70 percent of the S&P 500 component companies report their results. The table below shows the companies that have the greatest potential to move the markets highlighted in green:

 

Apple CenturyLink Merck & Co
Aetna CVS Health National Cinemedia
AIG Dish Network Owens & Minor
Allstate Dunkin Brands Pfizer
Advanced Micro Devices Callaway Golf Papa Johns
Arrow Electronics Energizer Ferrari
Alibaba Group Facebook Revlon
Ball Fitbit Sprint
Bp Hyatt Hotels Sprouts Farmers Markets
Berkshire Hathaway Herbalife Shake Shack
Anheuser-bush Jack Henry Molson Coors
Cabela’s Kellogg Tesla
Cardinal Health Kraft Heinz Time Warner
Cheesecake Factory MasterCard Texas Roadhouse
Avis Budget Mondelez Wingstop
Church & Dwight MetLife Aqua America
Clorox MoneyGram Western Union
ConocoPhillips Altria Group Zillow Group

 

This week Apple releases its first quarter earnings, which is almost always an event that is very closely followed by Wall Street since Apple is such a large player in the technology industry. iPhone sales are still the number one metric that analysts look at when evaluating Apple and this single figure will likely drive the overall performance of the stock the day following the company’s earnings release. With Apple making up such a sizable percentage of several major indexes overall, market trading the day following Apple’s release could be largely driven by Apple’s results. Facebook and Tesla are two other technology titans that will be closely followed as they release their earnings. After Exxon beat expectations last week by more than 10 percent, the pressure is mounting for BP and ConocoPhillips to also post very strong results. Remember that more than a quarter of the overall earnings growth rate for the S&P 500 during the first quarter is supposed to come from the energy sector so we need to see strong results from these two if the S&P is going to hit earnings growth rate targets overall. MasterCard reports earnings this week. Visa posted stronger than anticipated sales two weeks ago, as did American Express, so there is an expectation that MasterCard will have performed well as well.

Politics here in the US had some impact on the US financial markets as President Trump officially celebrated his first 100 days in office on Saturday. Passing a budget to avert a government shutdown was the priority last week in Washington DC and while they took it down to the wire, they did manage to pass a 1 week funding measure, which will give them enough time to work on a full funding bill to keep the government funded for the next 5 months. Over the past weekend there was a $1.1 trillion-dollar spending bill released by the Senate, which would keep the government running, but it held almost none of the President’s requested items as the Republicans need at least 8 members of the Democratic party to vote for the bill in the Senate to reach the 60 votes needed for it to pass. There is no funding for the border wall, no punishments for Sanctuary cities, no removal of subsidies for low income affordable care recipients and no cuts to the domestic government agencies that had been proposed by the administration. The Democrats clearly won this political round, evident by the following article title from Bloomberg on Monday morning: “US Spending Deal Jettisons Trump Goals as conservatives Howl.” The next fight in Washington will likely come on tax reform after President Trump released his plan for tax reform in the form of a one page memo last week, which got both sides of the aisle fired up. The biggest changes from the proposed tax reform include items such as increasing the standard deduction, while at the same time removing all deductions aside from mortgage interest and charitable donations. Brackets would condense from their current seven down to only three, but there was no clarity as to income levels and break points for each bracket as these were deemed to be “minor details” by the administration. Most of the analysis produced since the proposed tax plan was released has indicated that it would greatly increase the national debt if enacted and that taxes would potentially increase for a significant portion of the middle class in America. On the positive side, the proposal calls for the corporate tax rates to be dropped from 35 percent down to 15 percent. In the end, when administration officials were asked how this would be a revenue neutral plan, they said the plan would pay for itself due to the increased economic growth in the US. As far as the chance of the tax reform bill making it through Congress in current form, the odds are zero. With the recent budget negotiations, Trump’s agenda was largely tossed by the way side and this will likely be the outcome of his proposals regarding tax reforms.

 

Global news impacting the markets:

There were a few new developments in the global news media that impacted financial markets last week, with the first being the results of the French election. As mentioned in the commentary last week, the first round of the French elections was held in France on Sunday, April 23rd, resulting in both Marine Le Pen and Emmanuel Macron advancing for a runoff election to be held on May 7th. Thirty-nine-year-old Macron is widely anticipated to win the second round of the election, with some polls putting him in the lead by more than 25 percent with just under a week to go until ballots are cast. The global financial markets and the Euro jumped higher on Monday last week following Le Pen’s seemingly certain defeat. With her defeat, France would strongly remain a support for the EU and the euro as a common currency, despite some tougher talk about wanting France to get more respect from Germany. Le Pen’s defeat may also go a long way toward quelling the populist movement in Europe, which suffered its first blow in the Netherlands’ election and may suffer a potential second blow in France. Another topic of the global media last week was trade wars brought about by the new US administration.

 

Canada was in the spotlight for the new administration last week as President Trump proposed a 20 percent tariff on Canadian lumber and exacerbated a war over Canadian milk being sold in the US. President Trump’s claim is that Canada unfairly prices both lumber and milk being exported to the US. However, these industries are just a starting point for a much broader negotiation of NAFTA, something President Trump has been calling for with Canada and Mexico since he was on the campaign trail. If he can’t renegotiate NAFTA, he has threatened to withdraw the US from it all together. While small scale trade wars may be beneficial, starting a fight with the US’s largest trading partner (Canada) seems like an excessive step, especially when China will surely step in and fill any void that is opened with trading agreements under NAFTA negotiations. The final piece of global news that moved the markets last week was about North Korea and the situation that is unfolding between the country and the rest of the world. The US carrier strike group has made it to the Korean peninsula and was joined by ships from Japan and South Korea along the way. North Korea proceeded to test fire yet another missile last week and it, like the one two weeks ago, blew up very shortly after takeoff. At this point, even China is seemingly conceding that change is coming for North Korea and it is only a matter of time before something sets off either North Korea or the US.

 

Technical market review:

 

With the rally seen on Monday last week following the outcome of the French election, the major US indexes are now either at or above their most recent trading ranges. The green lines remain the daily index movements, while the yellow lines are the same trading ranges that have been drawn for the past several weeks. The red line on the VIX chart remains the 52-week average level of the VIX.

Monday saw a big jump in the US markets and with the potential risk of the French election largely gone, there was a drastic decline in the VIX. The move upward on the US equity indexes broke the NASDAQ (lower left pane above) out of its most recent trading range in a large way and extended the index’s lead over the other two in terms of technical strength. The NASDAQ also moved notably higher on Wednesday following a string of announcements of earnings from a few of the component companies. Both the S&P 500 (upper left pane above) and the Dow (upper right pane above) remain tied in terms of technical strength with both indexes closing out last week almost exactly on top of the upper edge of their respective trading ranges. We will have to wait and see if the indexes manage to push higher this week as earnings will once again be the primary driver of market movements. On Monday last week, the VIX dropped by about a quarter and then proceeded to set a new low point for the past year over the next few days before moving up slightly at the end of the week. The VIX continues to price in complacency as the US and global markets muddle through the current geopolitical and economic uncertainty seen around the world.

 

Hybrid model performance and update

For the trading week ending on 4/28/2017, returns in the hybrid and quant hypothetical models* (net of a 1% annual management fee) were as follows:

 

  Last Week 2017 YTD Since 6/30/2015
Aggressive Model 0.25% 3.60% 9.14%
Aggressive Benchmark 1.74% 7.11% 6.91%
Growth Model 0.33% 3.52% 8.17%
Growth Benchmark 1.36% 5.54% 5.69%
Moderate Model 0.33% 3.12% 6.86%
Moderate Benchmark 0.97% 3.98% 4.36%
Income Model 0.30% 3.09% 6.63%
Income Benchmark 0.50% 2.07% 2.55%
Quant Model 1.27% 9.33%
S&P 500 1.51% 6.49% 16.18%

*Model performance does not represent any specific account performance but rather a model of holdings based on risk levels that are like my actual holdings, the hypothetical models are rebalanced daily to model targets.

 

There were no changes to the hybrid models over the course of the previous week. During the week last week, we saw several of the equity holdings in the models report earnings with some companies beating expectations and a few falling short. VF Corp was one holding that moved lower last week after announcing earnings that were in line with markets expectations as the retail environment continues to be a challenging one for them. On a positive note, the company saw gains in its international business and online and direct-to-customer platforms, which has been a focal point for the company over the past few years. Canadian National Railway was another holding that had a difficult week as the tariffs between the US and Canada hit the stock over concerns of lower shipping volumes between the two countries; this news came on the heels of the company beating earnings expectations for the first quarter of 2017. McDonald’s, as mentioned above, posted very strong results for the first quarter and jumped nearly 4.5 percent last week, making it one of the best weeks for the stock in several years. General Dynamics reported strong earnings and benefitted from the rising tension on the Korean Peninsula last week to post solid gains as well. In aggregate, we are more than half way through the equity holdings of the hybrid models reporting earnings and so far it has been a positive earnings season.

 

Market Statistics:

 

The markets jumped higher on the heels of the French election last week, making it two weeks in a row of gains for the US markets:

 

Index Change Volume
NASDAQ 2.32% Average
Dow 1.91% Average
S&P 500 1.51% Average

 

Volume overall was only average last week when looking at the last year of weekly volume. This was a little unusual given the higher amount of volume seen on select stocks around their earnings announcements. Typically, with so many companies reporting their results, volume is higher than average, but last week this was not the case.

 

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
Medical Devices 4.00%   Telecommunications -0.27%
Biotechnology 3.53%   Transportation -0.33%
Pharmaceuticals 3.34%   Natural Resources -0.42%
Technology 2.92%   Oil & Gas Exploration -0.43%
Healthcare 2.81%   Residential Real Estate -2.54%

 

With hope of a healthcare bill being revived on Capitol Hill after some members of the Freedom caucus agreed to a new set of terms, all healthcare related sectors jumped higher. One of the main changes made to the revised bill is that insurers can increase rates on patients with preexisting conditions when policies renew. Essentially, health insurers can price out anyone they do not think fit in their risk parameters. This in turn would free up money in the system to be spent on the healthier patients who do obtain coverage. This change was the primary driver behind the jump in healthcare related sectors last week. The move may be a bit premature as the Republicans, even with the proposed changes, still do not have the votes needed for passage in the House. The sectors that declined last week were random with no clear theme surrounding the declines. Real Estate declined for the first time in five weeks last week as investors booked some nice short term gains in the sector. Oil and Gas Exploration as well as Natural Resources declined as the continued global over supply of oil doesn’t look like it will be letting up any time soon. Transportation and Telecommunications rounded out the bottom five performing sectors as earnings results by large component companies pushed the groups lower.

 

Fixed income markets here in the US saw muted trading last week as overall yields increased slightly during the week. Traders are awaiting the upcoming Fed meeting this week; the Fed is not expected to increase rates.

 

Fixed Income Change
Long (20+ years) -0.96%
Middle (7-10 years) -0.29%
Short (less than 1 year) 0.00%
TIPS 0.25%

Global currency trading volume was average last week as many are waiting on the Fed before making any changes in their holdings. Overall, the US dollar declined 0.93 percent against a basket of international currencies. The Euro enjoyed a strong week following the French elections, gaining 1.5 percent against the dollar. The best performing of the global currencies last week was the Icelandic Krona as it gained 2.84 percent against the value of the US dollar. The worst performance among the global currencies was the New Zealand dollar, with a decline of 2.35 percent against the US dollar for the week.

Commodities were mixed last week, as Livestock jumped higher by more than 8 percent:

Metals Change   Commodities Change
Gold -1.26%   Oil -0.78%
Silver -4.23%   Livestock 8.08%
Copper 2.00%   Grains 1.03%
      Agriculture 2.33%

The overall Goldman Sachs Commodity Index declined 0.21 percent last week. Oil declined by 0.78 percent for the week as OPEC continues to weigh further production cuts against the speed at which US fracking production is being brought on line. Metals were mixed last week with Gold and Silver falling 1.26 percent and 4.23 percent, respectively, while Copper increased by 2 percent. Soft commodities advanced last week with Agriculture gaining 2.33 percent, while Livestock advanced 8.08 percent and Grains posted a gain of 1.03 percent. The large gain in Livestock was primarily driven by beef prices, which saw a spike higher and financial funds moved in to take advantage of a large discount in the futures market, which pushed the value of cattle to a one year high on Friday.

Top 2 Indexes Country Change   Bottom 2 Indexes Country Change
Caracas General Venezuela 17.05%   KSE 100 Pakistan -0.82%
ATX Austria 5.56%   CASE 30 Egypt -2.95%

Last week was a good week for global financial markets as 86 percent of the markets posted gains over the course of the week. The best performing index last week was found in Venezuela for the fifth week in a row, as the Caracas General Index turned in a gain of 17.05 percent for the week. The gains in Venezuela continue to be on the increasing likelihood that President Maduro will be forced out of office soon. The worst performing index last week was found in Egypt and was the CASE 30 Index, which turned in a loss of 2.95 percent as foreign investors pulled some of their profits from the country after booking solid gains so far during 2017.

As mentioned above, the VIX plunged last week, falling by more than 26 percent following the first round of the French election. Despite several other geopolitical hot spots around the world, the VIX is now very close to the lowest point it has been at over the past year, which was officially hit on Wednesday of last week. The current reading of 10.82 implies that a move of 3.12 percent is likely to occur over the next 30 days. As always, the direction of the move over the next 30 days is unknown.

Economic Release Calendar:

 

Last week was a typical week for economic news releases and there were releases that both missed and beat expectations. The release that missed the most last week is highlighted in red below, while the release that beat expectations by the most is highlighted in green:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Neutral 4/25/2017 Case-Shiller Home Price Index February 2017 5.9% 5.8%
Neutral 4/25/2017 New Home Sales March 2017 621K 590K
Slightly Negative 4/25/2017 Consumer Confidence April 2017 120.30 122.30
Slightly Negative 4/27/2017 Durable Orders March 2017 0.7% 1.2%
Negative 4/27/2017 Durable Goods –ex transportation March 2017 -0.2% 0.4%
Neutral 4/28/2017 GDP-Adv. Q1 2017 0.7% 1.1%
Positive 4/28/2017 Chicago PMI April 2017 58.3 56.9
Neutral 4/28/2017 University of Michigan Consumer Sentiment Index April 2017 97.0 98.0

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

 

Last week, the economic news releases started on Tuesday with the release of the Case-Shiller Home price index for the month of February, which came in close to expectations at 5.9 percent. This, combined with the new home sales figure for the month of March, which came in a little better than expected, continued to show the US housing market in a positive light. Also reported on Tuesday was the latest calculation of consumer confidence, which pulled back a little from the reading seen in March, but still remains very elevated. Conflicting with the confidence data somewhat last week was the durable goods orders for the month of March, which both came in below expectations as overall orders increased by only 0.7 percent and durable goods orders excluding transportation declined by 0.2 percent during March. On Friday, the advanced print for first quarter GDP disappointed expectations, coming in at 0.7 percent, while the markets had been expecting a reading of 1.1 percent. While the reading may look very low, which it is, it’s not uncommon for the first quarter GDP figure to be significantly lower than subsequent quarters. The reasons behind the poor GDP figures during the first quarter are a bit of a mystery, even to Federal Reserve officials, which have mentioned the strange phenomena in the past. Later during the day on Friday, the Chicago area PMI for the month of April was released and showed that manufacturing in the greater Chicago area increased faster than anticipated. Wrapping up the week last week was the release of the latest Consumer Sentiment Index calculation from the University of Michigan, which showed a very small deterioration between the mid-April and the end of April figure.

 

This week is a standard week for economic news as there are several month-end related releases, mostly related to the labor market, that could have a noticeable impact on the overall markets:

 

Date Release Release Range Market Expectation
5/1/2017 Personal Income March 2017 0.30%
5/1/2017 Personal Spending March 2017 0.10%
5/1/2017 PCE Prices – Core March 2017 0.00%
5/1/2017 ISM Index April 2017 56.5
5/3/2017 ADP Employment Change April 2017 170K
5/3/2017 ISM Services April 2017 55.8
5/3/2017 FOMC Rate Decision May 2017 No Change
5/5/2017 Nonfarm Payrolls April 2017 180K
5/5/2017 Nonfarm Private Payrolls April 2017 175K
5/5/2017 Unemployment Rate April 2017 4.60%

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

 

This week the economic news releases start on Monday with the release of personal income and spending, both for the month of March. Both releases seem a little too optimistic given the poor reading that we have seen in the past, despite the elevated level of consumer confidence currently being seen. The overall ISM index for the month of April is set to be released before the market opens on Monday, but there is not a lot of change expected so the markets will likely largely ignore the results if they come in close to expectations. On Wednesday, the May FOMC meeting concludes with a statement, but no press conference. The likelihood of a rate hike at this meeting is virtually zero, so it should be a non-market moving event unless the Fed provides some concrete evidence as to when it is thinking about raising rates in the future. On Friday, the focus of the economic news releases will be on the US labor market. The overall unemployment rate for the month of April is released in addition to the payroll figures and many other data points related to employment in the US. Overall, the employment market in the US is expected to have increased slightly up to 4.6 from 4.5 percent during the month. Payroll figures are expected to have more than doubled the dismal numbers that we saw in March, while the labor force participation rate is not expected to have changed much at all. As has been the case for the past several months, the labor market data that is released on Friday is not expected to have any material impact on the thinking of the Fed about future interest rate moves.

 

Interesting Fact Apple’s cash

 

One of the hotly debated parts of the tax reform is the repatriation of cash by large multinational companies back into the US so that the funds can be used here in the US. Currently, money brought back into the US from operations outside of the US is taxed at the full corporate tax rate, resulting in many companies leaving cash offshore and to avoid taxation. Apple is a poster child of this debate since the company currently has approximately $250 billion offshore. This $250 billion is more than the foreign currency reverses held by the UK and Canada combined!

 

Source: WSJ.com

 

For a PDF version of the below commentary please click here Weekly Letter 4-24-2017

Commentary quick take:

 

  • Major developments:
    • Markets increased last week
    • Earnings season still strong
    • Oil plummeted
    • First round of the French election is in the books

 

  • US:
    • Congress in recess last week
    • Earnings season
      • Results continue to be strong
      • Very busy the next two weeks for earnings

 

  • Global:
    • French election results
    • Snap elections called for in the UK
    • China growing, but growing slowly
    • OPEC losing impact on oil market

 

  • Technical market view:
    • NASDAQ remains strongest
    • S&P 500 made it back into its most recent trading range
    • VIX moved lower

 

  • Hybrid investments strategy update:
    • No changes last week

 

  • This week for the markets:
    • Trump’s first 100 days
    • Potential US government shutdown—again
    • Many earnings reports
    • North Korea
    • OPEC official announcement
    • US GDP figure for first quarter 2017

 

  • Interesting Fact: Emmanuel Macron

 

Major theme of the markets last week: US Earnings

 

Last week, the primary focus of the financial markets was the first quarter of 2017 earnings season. This was due to the US Congress being in recess, the absence of major developments with North Korea and Europe’s wait for the outcome of the presidential elections held in France on Sunday. The results from earnings that were posted last week were strong. We are still seeing greater than 75 percent of companies that have reported earnings beat Wall Street expectations. However, we are still in the very initial stages of earnings season and the outcome of earnings over the next two weeks could largely sway the overall season either positively or negatively, as we will see 65 percent of the S&P 500 component companies release their results. The French elections turned out as expected with far right candidate Marine Le Pen and more centrist candidate Emmanuel Macron moving on to a runoff election that will be held May 7th.  Global financial markets pointed toward a higher opening on Monday following the announcement of the results in France, as it is highly unlikely that Le Pen will win the runoff election; some polls have her trailing by as much as 30 percent against Macron in a head-to-head race.
US news impacting the financial markets:

 

With Congress still in recess, leaving politics in limbo with town hall style meetings being held all over the US last week, the markets chose to focus on something that more directly impacts the financial markets—earnings. Last week was the first full week of earnings announcements as there were a sizeable number of companies that reported their results. Below is a table of the well-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:

 

Abbott Labs 12% GNC 12% Philip Morris -5%
American Express 5% Goldman Sachs -4% Schlumberger 0%
Bank of America 17% Harley-Davidson 6% Charles Schwab 5%
Bank Of New York 0% Honeywell 2% Sherwin Williams 10%
Blackrock 6% IBM 2% Travelers -10%
CSX 19% Johnson & Johnson 3% United Continental 11%
D R Horton 2% Kinder Morgan -6% UnitedHealth 9%
Dish Network pushed Las Vegas Sands pushed US Bank 3%
EBay 8% Manpower -2% Verizon -3%
General Electric 19% Morgan Stanley 11% Visa 9%
Genuine Parts 3% Netflix 5% Yahoo! -25%

 

It was a tie in terms of green and red highlighting in the above table last week, with a few major companies turning in strong results and some turning in surprising misses. Financials followed the lead of the big banks that reported two weeks ago with Morgan Stanley, Bank of America, Blackrock and Charles Schwab all posting solid gains. The outlier of the group last week was Goldman Sachs, which turned in poor results after seeing trading revenue (particularly bond trading revenue) decline, while almost all the other major financial institutions saw gains in their bond trading divisions. Insurance was one area of the market that had a difficult first quarter with Travelers missing expectations by 10 percent, while RLI Corp (it was sold in the hybrid models several weeks ago) also had a tough time with losses and lower underwriting revenues. Large pipeline operator Kinder Morgan reported results that fell below expectations last week as the new administration has been relatively slow with its energy agenda, except for giving the “okay” to the Keystone and Dakota access pipelines. Verizon and Yahoo both missed expectations last week with Verizon seeing a decline in overall US subscribers for the first quarter ever. Yahoo made its final report last week as its purchase by Verizon is likely to close during the second quarter. Yahoo had poor results and what appeared to be some less than stellar management issues during the quarter accompanied by a large write down, which adversely impacted the company.

 

According to Thomson Reuters, we have seen 95 (19 percent) of the S&P 500 companies release their results for the first quarter of 2017. Of the 95 that have released earnings, 76 percent have beaten earnings estimates, while 10 percent have met expectations and 14 percent have fallen short of expectations. When looking at revenue, of the companies that have reported, 62 percent of the companies have beaten estimates, while 38 percent have fallen short. The overall expected growth rate for S&P 500 earnings for the first quarter currently stands at 11.2 percent, with almost 4 percent of that number coming from the energy sector. Next week there are 194 S&P 500 component companies reporting earnings and the week following there are 131, so these next two weeks will likely hold some interesting twists and turns on an individual stock basis.

 

This week we move into the busy time for earnings season, with more than 1,000 companies reporting their first quarter results. After this week, we will have a better idea about how the overall earnings season could turn out for the markets. The very large table below shows the companies that have the greatest potential to move the markets highlighted in green:

 

Alcoa Goodyear Tire Raytheon
American Airlines Halliburton Starbucks
Aflac Hershey Six Flags
Arthur J Gallagher Intel Simon Property
Amazon.com Jetblue Skyworks
Anthem J&J Snack Foods Stryker
AptarGroup Kimberly Clark AT&T
Boeing Coca Cola T-Mobile
Bristol-Myers Lockheed Martin TransUnion
Caterpillar Southwest Air Tractor Supply
Colgate-Palmolive Las Vegas Sands Twitter
Comcast McDonald’s Texas Instruments
Chipotle 3m Co Under Armour
Canadian National Railway Microsoft UBS
Cube Smart Newmont Mining United Technologies
Chevron Northrop Grumman V F Corp
Daimler Nintendo Volkswagen
Dow Chemical Office Depot Western Digital
Dr Pepper Snapple Pepsi Whirlpool
Ford Motor Procter & Gamble Waste Management
Fiat Chrysler Panera Bread Weyerhaeuser
General Dynamics Public Storage Xcel Energy
General Motors Phillips 66 Exxon Mobil
Alphabet PayPal Xerox

 

Technology and Consumer Product giants will dominate the earnings releases this week. Alphabet (Google), Microsoft, Proctor & Gamble, Intel, Coca Cola and Amazon—just to name a few—could easily push around the indexes they are included in. With almost 40 percent of the S&P 500 reporting results next week, there are bound to be some big winners and some big losers. In general, when there are as many companies reporting earnings as there are this week, it has a neutral effect on the overall markets. Exxon is the first of the major integrated energy companies to report earnings and will be very closely watched by Wall Street. Oil prices were not great during the first quarter of 2017, but Exxon should have done enough in the way of cost saving measures to ensure that it had a pretty good quarter. If we see Exxon miss expectations it could very quickly cast doubt on the lofty earnings expectations for the markets overall since so much of the expected gains are coming from the energy sector.

 

Politics will move back into the headlines alongside earnings reporting this week as President Trump has promised movement on several topics now that Congress is back in session. With Trump’s 100 days coming up Saturday he is going to be under some pressure to try to give at least one more push to a campaign promise or two. Tax reform seems to be his current target as he has said he will unveil his reforms this week. His problem will be that he is adding the caveat that the reform will be done quickly if there is healthcare reform as well. He needs to get the savings from healthcare reform, especially the 3.8 percent extra tax from the affordable care act, to be able to lower the individual income tax brackets. President Trump has been all over the map on his expectations for tax reform, especially if you look at what was said on the campaign trail. We could see brackets go from 7 (currently) down to 3 or 4 and rates fall by double digits for some Americans. However, if he makes too many changes he could lose the backing of the Freedom caucus, which is the same group that held up healthcare reform. He has a very fine line to walk with tax reform without needing the backing of Democrats, which he would not likely receive. Also on the docket this week in Washington DC will be a fight over the budget, as the US government will officially shutdown on Saturday, April 29th, if Congress cannot agree on a budget. It is a little ironic that Saturday also happens to be Trump’s 100th day in office. Financial markets are unlikely to react negatively to the negotiations surrounding the budget as they have blissfully been able to ignore many political fights in the past and a government shutdown threat does not have the weight it once did.

 

Global news impacting the markets:

 

Global news impacting the financial markets was prevalent last week. The French elections held a lot of the spotlight late in the week last week with the first round of the Presidential elections in France held on Sunday. As was widely expected, right wing leader Marine Le Pen and centrist Emmanuel Macron advanced to the second round of the election, which will be held on May 7th. Neither candidate secured more than 50 percent of the vote, which would have negated the need for a second round. Financial markets around the world reacted positively to the outcome of the election in France, observed in the pre-market movements on Monday, as there is near certainty that Macron will win the next round. A win by Macron would ensure that France remains in the EU and on the Euro as the country’s currency. He represents a much more stabilizing and more-of-the-same political stance than Le Pen, who is anti-Euro and anti-EU. Current polls for the second round of the French election had Macron winning by more than 25 percent as many of the other nine candidates from the first round are politically more aligned with Macron than Le Pen and their supporters will likely support Macron or not vote at all in the second round. The French elections were not the only elections discussed last week; UK Prime Minister Theresa May made a surprise election announcement early last week.

 

PM Theresa May announced that a snap election would be held in the UK on June 8th. This was a purely political move in that she knows her party currently has a strong hand in Parliament, but she wants an even stronger hand as Prime Minister to reduce the need for outside party support during the Brexit negotiations. Expectations are that May’s party will win several new seats in parliament and, while not gaining an outright majority, will be able to form a coalition government with a few smaller groups that are more aligned with her thinking about the Brexit. This announcement of a snap election caught the markets a little by surprise because up until the week prior, PM May was saying that no new elections were needed.

 

There were two other lesser themes in the international media last week, one being OPEC and the other being China. Last week there was a panel discussion by OPEC members. The outcome of the meeting was that the current production cuts need to remain in place and that they would eventually start to work once the oversupply situation in the global markets corrects itself. Even Iran accounted that if the production cuts are extended, the country would agree to them, which is something that did not happen with the initial cuts put in place back in November. However, the OPEC announcement failed to prop up the price of oil last week. Oil prices declined by more than 7 percent as the US showed a much smaller than expected decline in oil inventories and an increase in gasoline stock piles for the first time in several months. The recent decline in the price of oil could have something to do with the political situation in Venezuela as current President Maduro seems to be more open to talks with political opposition as the price of oil declines.

 

China also made a few headlines last week as the government officially released its GDP figures for the first quarter of 2017. First quarter GDP in China was released to be 6.9 percent on a year-over-year basis, a slight increase from the 6.8 percent seen during the fourth quarter of 2016. Overall for 2016, growth in Chinese GDP was 6.7 percent, the lowest in the past 20 years, with much of the growth directly attributed to government stimulus programs. China remains one of the large wild cards in the global economy as a hard landing by such a large economy on a global scale could have far reaching, negative reverberations.

 

Technical market review:

 

There were no changes to the time frame or trading ranges this week in the technical charts below. The green lines remain the daily index movements, while the yellow lines are the same trading ranges that have been drawn for the past several weeks. The red line on the VIX chart remains the 52-week average level of the VIX.

The NASDAQ (lower left pane above) managed to rise through its trading range late in the week last week, only to fall slightly on Friday and end the week near the upper edge of the range. The NASDAQ remains the strongest of the three major US indexes. The S&P 500 (upper left pane above) managed to break back into its most recent trading range and close out the week within the range, making it the second strongest index of the main three. The Dow (upper right pane above) made a run at its most recent trading range last week, but ultimately failed to break back in, bouncing off the lower edge of the range twice during the week. We have now seen almost three months of sideways movement in the markets as they await action from the new administration and Congress.

 

Hybrid model performance and update

For the trading week ending on 4/21/2017, returns in the hybrid and quant hypothetical models* (net of a 1% annual management fee) were as follows:

 

Last Week 2017 YTD Since 6/30/2015
Aggressive Model 1.02% 3.34% 8.86%
Aggressive Benchmark 0.38% 5.28% 5.08%
Growth Model 0.72% 3.18% 7.81%
Growth Benchmark 0.30% 4.12% 4.27%
Moderate Model 0.40% 2.78% 6.50%
Moderate Benchmark 0.22% 2.97% 3.35%
Income Model 0.19% 2.78% 6.30%
Income Benchmark 0.11% 1.56% 2.04%
Quant Model 1.62% 7.96%
S&P 500 0.85% 4.91% 14.45%

*Model performance does not represent any specific account performance but rather a model of holdings based on risk levels that are like my actual holdings, the hypothetical models are rebalanced daily to model targets.

 

There were no changes to the hybrid models over the course of the previous week. Defensive positioning in individual stock as well as positions in industrials and materials helped boost overall performance of the models last week. The models remain almost fully invested with a small hedging position in place to help protect against broad market shocks to the downside.

 

Market Statistics:

 

After two weeks in a row of declines occurring on the three major US indexes, it was not very surprising to see the markets turn in a positive week last week as they focused on earnings and not on the geopolitical tensions that seem to be building in several areas of the world:

 

Index Change Volume
NASDAQ 1.82% Below Average
S&P 500 0.85% Average
Dow 0.46% Average

 

Volume was about average last week on both the S&P 500 and the Dow, while the NASDAQ was slightly below average. Earnings seemed to be the primary driver of market movements last week. There were relatively fewer announcements in NASDAQ listed companies that could have accounted for the lower volume seen when compared to the other two indexes, which saw several heavily weighted component companies report earnings.

 

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 4.86% Biotechnology -1.07%
Transportation 2.98% Pharmaceuticals -1.81%
Regional Banks 2.85% Energy -2.23%
Aerospace & Defense 2.48% Oil & Gas Exploration -2.43%
Industrials 2.38% Commodities -4.68%

 

Semiconductors led the way higher last week, but it was not earnings announcements that pushed the sector higher. Two weeks ago, Semiconductors declined by almost 4 percent as investors moved out of risky assets in favor or lower risk assets. Last week, it seemed some of those same investors were jumping back into the sector and driving up the price as it gained almost 5 percent. Movement among the other four of the top five sectors of the markets were earnings announcement driven. Of the bottom five sectors, the bottom three sectors were all related to the steep decline in the price of oil seen the previous week. The Pharmaceutical and Biotechnology sectors rounded out the bottom five performing sectors of the markets last week, attributed to fears over potential price controls being implemented by the government under any new healthcare reform bills Congress may try to pass in the coming weeks.

 

After several weeks of outsized movement in the fixed income markets last week, we finally saw a slow and more normal week in fixed income investments as there was little overall movement:

 

Fixed Income Change
Long (20+ years) 0.06%
Middle (7-10 years) -0.03%
Short (less than 1 year) -0.01%
TIPS -0.44%

Global currency trading volume was above average last week as many traders implemented hedges and counter currency, buying toward the end of the week to protect against something unexpected occurring in the French elections. Overall, the US dollar declined 0.65 percent against a basket of international currencies. The British pound gained almost 2.5 percent against the dollar, while the Euro gained a little more than 1 percent. The best performing of the global currencies last week was the South African Rand for the second week in a row, as it gained 2.6 percent against the value of the US dollar. The worst performance among the global currencies was the Argentine Peso, with a decline of 2.1 percent for the week.

Commodities were all lower last week, following on the heels of a predominantly positive week for commodities two weeks ago:

Metals Change Commodities Change
Gold -0.24% Oil -7.28%
Silver -2.91% Livestock -1.24%
Copper -0.89% Grains -3.39%
Agriculture -2.08%

The overall Goldman Sachs Commodity Index declined 4.68 percent last week. Oil was the primary culprit behind the decline in the commodity index as it declined by 7.28 percent for the week following OPEC comments, discussed above in the global news section. Metals slid last week with Gold, Silver and Copper falling 0.24 percent, 2.91 percent and 0.89 percent; respectively. Soft commodities declined last week as well, with Agriculture falling 2.08 percent, while Livestock declined 1.24 percent and Grains posted a loss of 3.39 percent; as spring has seemed to come and go very quickly in many of the growing regions of the US with temperatures being well above average for this time of year.

Top 2 Indexes Country Change Bottom 2 Indexes Country Change
Caracas General Venezuela 4.80% FTSE 100 U.K. -2.91%
KSE 100 Pakistan 3.67% Shanghai Composite China -3.14%

Last week was a mixed week for global financial markets as only 40 percent of the markets posted gains over the course of the week. The best performing index last week was found in Venezuela for the fourth week in a row, as the Caracas General Index turned in a gain of 4.80 percent for the week. The gains in Venezuela came on the announcement that President Maduro is open to discussions with the political opposition group about bringing forward the presidential election that is currently scheduled to be held in 2018. This is seen globally as President Maduro bowing to the political pressures and protests that have gripped his country for the past several weeks, with many of the protests becoming increasingly violent. The worst performing index last week was found in China and was the Shanghai Composite Index, which turned in a loss of 3.14 percent after the government in China released its latest GDP figures, which came in slightly better than anticipated, but still signals a drastic slowdown in the economy compared to the growth rate enjoyed just a few years ago.

Following an increase of more than 24 percent two weeks ago, the VIX last week declined as expected, but only by 8.3 percent. The size of the decline was less than some analysts were anticipating, given that there was no flare up with North Korea during the week and that earnings season continued to be strong here in the US. Some of the decline that might have otherwise occurred could be slightly delayed, as the markets last week were awaiting the outcome of the French elections over the weekend. The current reading of 14.63 implies that a move of 4.22 percent is likely to occur over the next 30 days. As always, the direction of the move over the next 30 days is unknown.

Economic Release Calendar:

 

Last week was a slow week for economic news releases; there were a relatively small number of releases with only a single release coming in different than expected:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Negative 4/17/2017 Empire Manufacturing April 2017 5.2 13.0
Neutral 4/18/2017 Housing Starts March 2017 1215K 1260K
Neutral 4/18/2017 Building Permits March 2017 1260K 1240K
Neutral 4/20/2017 Philadelphia Fed April 2017 22.0 21.8
Neutral 4/21/2017 Existing Home Sales March 2017 5.71M 5.55M

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

Last week the economic news releases started on Monday with a poor reading on the Empire manufacturing index for the month of April. Expectations had been high for this release as the market was expecting a reading of 13; the print came in at only 5.2. While this figure shows that manufacturing picked up in the month, it did so at a much slower than anticipated pace. On Tuesday, the housing starts and building permit data for the month of March were released with both figures coming in relatively close to expectations, leading to no noticeable market reaction. On Thursday, the US manufacturing picture got a little relief as the Philadelphia Fed index came in very close to the expected 21.8, printing a 22.0 reading. This reading was counter to what was seen in the Empire Index and provided some hope that manufacturing in the US is still quickly picking up the pace. Wrapping up the week last week was the release of the existing home sales figure for the month of March, which came in very close to expectations and had no noticeable market impact.

 

This week is a standard week for economic news releases in terms of the overall number of releases, with several releases that could have a noticeable impact on the overall markets:

 

Date Release Release Range Market Expectation
4/25/2017 Case-Shiller Home Price Index February 2017 5.8%
4/25/2017 New Home Sales March 2017 590K
4/25/2017 Consumer Confidence April 2017 122.3
4/27/2017 Durable Orders March 2017 1.2%
4/27/2017 Durable Goods –ex transportation March 2017 0.4%
4/28/2017 GDP-Adv. Q1 2017 1.1%
4/28/2017 Chicago PMI April 2017 56.9
4/28/2017 University of Michigan Consumer Sentiment Index April 2017 98.0

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

 

This week the economic news releases start on Tuesday with the release of the Case-Shiller Home Price Index for the month of February, which is expected to show an annual gain of 5.8 percent for homes on average here in the US. While this could help the real estate related companies listed in the markets, it is unlikely as the data is very stale. Also on Tuesday, the new home sales figure for the month of March will be released. This has a slightly better chance of moving the housing related stocks, but even then, the odds are low for market movement from this release. Later during the day on Tuesday, a very important economic news release is being released, that being the consumer confidence figure for the month of April, as measured by the US government. We have recently seen high confidence levels and yet spending has continued to lag; either confidence is too high or spending is too low. At some point, we would expect to see one of the two indicators move toward the other. Expectations for consumer confidence remain lofty for the month of April and the market could easily be let down by this release. On Thursday, we receive some information about spending here in the US as the durable goods orders, both including and excluding transportation, are released. Expectations are low for both releases, with overall orders expected to have increased by only 1.2 percent during March. If we see a very low or even negative print on this release it could lead to a negative reaction from Wall Street. On Friday, the government releases its first estimate of first quarter 2017 GDP, which is expected to be only 1.1 percent growth. This is substantially below the 2.1 percent growth seen during the fourth quarter of 2017, according to the latest revision of GDP released by the government. This expected 1.1 percent growth seems a little low and we could easily see a surprise to the upside on this release. Being largely overshadowed on Friday is the release of the Chicago PMI and the latest reading from the University of Michigan’s Consumer Sentiment Index, both for the month of April and both not expected to have moved much when compared to the previous month’s reading. In addition to the scheduled economic news releases this week, there are four Fed officials giving speeches that the markets will be closely monitoring for any clues about the timing for the Fed’s next interest rate hike.

 

Interesting Fact Emmanuel Macron

 

If elected President in the runoff election, Emmanuel Macron will become the youngest President of France, at 39 years old. The former investment banker formed his own political party called “En Marche!,” which means Forward! Prior to forming his own political party he was registered as an independent and prior to being an independent he was a member of the socialist party in France. He is pro European Union and wants to make France more business friendly.

 

Source: BBC News

For a PDF version of the below commentary please click here Weekly Letter 4-17-2017

Commentary quick take:

 

  • Major developments:
    • Markets pushed lower
    • Bond prices increased, pushing yields lower
    • Holiday trading week
    • Risk-off trade seen in US markets

 

  • US:
    • Congress currently in recess
    • Earnings season officially kicked off last week
      • US financials posted better than expected results
    • Prices showed deflationary data points
    • Doubt over the Fed’s ability to raise rates

 

  • Global:
    • North Korea
      • Celebrated the birthday of Kim Il-sung
      • Failed missile launch
      • International community response
    • French election is this week

 

  • Technical market view:
    • Two indexes broke below their trading ranges
    • VIX spiked higher

 

  • Hybrid investments strategy update:
    • No changes last week
    • Risk-off trade benefited many holdings

 

  • This week for the markets:
    • French elections
    • North Korea
    • Lack of US politics in the news
    • OPEC meeting

 

  • Interesting Fact: Are you done filing your taxes?

 

Major theme of the markets last week: North Korea

The major theme of the markets last week was North Korea and the US’s response to the country’s testing of nuclear devices and missile launches. North Korea was one of the major talking points two weeks ago at a meeting between US President Trump and Chinese President Xi Jinping. China has for a long time been one of the only countries in the world holding a trading relationship with North Korea. China predominantly buys coal from North Korea, which provides North Korea with a much-needed life line of money flowing into the country. Following the meeting of US and Chinese leaders in Washington DC, the coal shipments from North Korean to China were turned around or rejected at the offloading ports in China. The US has said it will increase its shipments of coal to China to offset the diminished supply of North Korean coal. With China now seemingly siding with the US and the rest of the world in its thinking about North Korea, the situation has the potential to reach a boiling point very quickly. While China still wants to try to broker a peaceful end to the current situation, the US seems to be taking a harder line approach, saying that the time for talking has passed and that all options are on the table in dealing with North Korea. The problem for the US is that we do not want to unilaterally act and remove the current government from power within North Korea, as it could lead to chaos, much like it did with Iraq and Libya. It is a delicate situation that the global financial markets have put a heavy price tag on in terms of volatility for the markets.

 

US news impacting the financial markets:

 

With the US markets trading in a shortened trading week last week, the primary focus of the financial media was on the official start of the first quarter earnings season last week. There was a lot of speculation about the overall earnings growth rate and what, if any, impact President Trump would have on reports from corporate America. While President Trump has been mentioned in almost all the quarterly calls thus far, his overall impact has yet to be seen in many businesses. Below is a table of the well-known companies that released earnings last week, with earnings that missed expectations highlighted in red (none), while earnings that beat expectations by more than 10 percent are highlighted in green (none):

Citigroup 10% Fastenal 0% Pier 1 Imports 3%
Commerce Bancshares 5% Infosys 0% PNC Financial 7%
Delta Air Lines 5% JPMorgan Chase 9% Wells Fargo 3%

 

 

 

 

 

With no coloring in the above table for earnings data last week, it is safe to say that earnings season started off very close to expectations last week. The major financials that reported earnings last week were overall better than anticipated, driven by fixed income and equity trading revenues as well as loan growth. Credit quality continues to be strong in the loan division of the major banks with most executives calling the current environment the best they have ever seen in terms of credit quality.

 

According to Factset Research, we have seen 30 (6 percent) of the S&P 500 companies release their results for the first quarter of 2017. Of the 30 that have released their earnings, 76 percent have beaten earnings estimates, while 10 percent have met expectations and 14 percent have fallen short of expectations. When looking at revenue, of the companies that have reported, 59 percent of the companies have beaten estimates, while 41 percent have fallen short. The overall growth rate that we have seen so far for S&P 500 earnings for the first quarter currently stands at 9.2 percent. It is still far too early to glean much useful information from the companies that have released results for the first quarter of 2017 thus far. The energy sector continues to be the primary driving force behind the earnings growth expected by the markets, with the subsector of integrated oil and gas companies leading the way higher with expected earnings growth of 482 percent during the first quarter.

 

This week is the second week for first quarter 2017 earnings to be reported, with many industry leading companies reporting their results. In total, 65 of the S&P 500 component companies will be releasing their results and 9 of the Dow 30 companies are reporting as well. The table below shows the companies that have the greatest potential to move the markets highlighted in green:

 

Abbott Labs GNC Philip Morris
American Express Goldman Sachs Schlumberger
Bank of America Harley-Davidson Charles Schwab
Bank Of New York Honeywell Sherwin Williams
Blackrock IBM Travelers
CSX Johnson & Johnson United Continental
D R Horton Kinder Morgan UnitedHealth
Dish Network Las Vegas Sands Us Bank
Ebay Manpower Verizon Communications
General Electric Morgan Stanley Visa
Genuine Parts Netflix Yahoo!

 

 

 

Financials will remain in the spotlight this week as Goldman Sachs, Bank of America and Bank of New York all report earnings. If they are like last weeks’ financial companies that reported, earnings should post solid growth. American Express and Visa will be closely watched by Wall Street this week as they both provide insight into consumer and business spending that may provide a little clarity surrounding the disconnect between consumer confidence and spending. Netflix is a darling of the hedge fund industry and nearly always producing some fireworks with their earnings results, with the primary question focused on subscriber growth and whether the company sustained its very high rate of growth during the quarter or not. Typically, it takes a lot for an airlines company to make the list of companies that could noticeably impact the overall markets, but this week there is one such company. United Continental Group reports its earnings this week and with all that has been going on with the PR nightmare, we could see more attention being given to this stock than is typical.

 

There was very little in the way of news out of Capitol Hill last week. Both the House and the Senate were out of session last week, which was the first of three weeks of a spring recess for both houses. While there are still numerous staff members and members of Congress at work in DC, there is nothing officially being done. This unique situation presents a lull for the markets that will remain in effect for the next two weeks as there is unlikely to be any movement on any political topics currently on the table. A session of Congress could be called, however, if there was an immediate need; one such situation that could call members of Congress back to DC would be the situation in North Korea.

 

Global news impacting the markets:

 

North Korea dominated the global media last week as the country continued to up the ante with the US in terms of verbose rhetoric that last week ended in failure. This past weekend marked the 105th birthday of the founding leader of the country, Kim Il-sung, and with it all the military pomp and circumstance that has become customary in marking the celebration. New missiles were paraded around the main square in Pyongyang, just hours before a failed launch of a missile that exploded just a few seconds after liftoff. With the US sending a navy assault group to the region and President Trump’s recent comments that the US will deal with North Korea alone if needed, it seems the situation on the Korean peninsula could be reaching a boiling point. Even China, which amassed military troops at the border with North Korea late last week, seems willing to take a much harder stance with North Korea to try to stop a potential conflict. This increased tension between North Korea and the rest of the world added a geopolitical risk premium to the global financial markets last week, most directly seen in the amount of implied volatility going forward as the VIX jumped by more than 24 percent here in the US and various other measures of volatility around the world spiked higher as well.  Historically, geopolitical situations have driven several very fast spikes in volatility measures around the world, with most of the spikes being very short lived. We will have to wait and see how the situation in North Korea unfolds to determine if this will be a short-lived spike or one that lasts longer than usual.

 

One other area of the global financial news that made headlines last week was the upcoming presidential election in France. The first round of the election is scheduled to be held on Sunday, April 23rd, and the outcome is likely to present the voters in France with an interesting conundrum come the second round of the election. Marine Le Pen, the leader of the far right National Front, is expected to move past this first round running on an anti-EU populist platform. This is essentially the same platform that won victory in the Brexit vote, but more recently failed in the Netherlands. Le Pen’s primary competitor will be Emmanuel Macron, who is a current politician in France and former investment banker. His campaign has been full of legal problems surrounding both himself and his wife, but his platform has been very pro-EU. There are 9 other candidates in the first round, but it is unlikely that any of the other nine will make it into the top two spots and move on to the second round of the election being held on May 7th. If by chance one candidate does manage to get 50 percent or more of the vote in the first round, that candidate wins the election without the need for a second round; but this seems very unlikely. If Le Pen ultimately wins the second round of the election, which she is not projected to do in a head-to-head race with Macron, it could mean the end of the EU as we currently know it as she has pledged to move France onto its own currency and withdraw from the EU. As one of the major countries in the EU, France’s departure would likely topple the house of cards that is currently in place.

 

Technical market review:

 

Over the course of last week, two of the three major US indexes broke down below their most recent trading ranges. I altered the time frame of the charts this week by shortening the date range of the charts. In doing so, it becomes much easier to see the most recent trading range as well as the subsequent movement of the indexes. The green lines remain the daily index movements, while the yellow lines on the index charts are the same trading ranges that have been drawn for the past several weeks. The red line on the VIX chart remains the 52-week average level of the VIX, which the index remains solidly below.

As you can see in the above charts, the NASDAQ (lower left pane above) is the only index that stayed within its most recent trading range, ending the week last week almost exactly on top of the lower bound of the range. Both the S&P 500 (upper left pane above) and the Dow (upper right pane above) fell below their respective trading ranges. Though they have not fallen enough that it would be a monumental task to move back into the range, they have declined by a significant amount, making their return into the trading range less likely than it would otherwise be. The VIX (lower right chart above) came to life last week, jumping higher for the week despite it being a holiday week and ending the week at the highest point we have seen on the VIX since November 8th of 2016. Much of the increase in the VIX last week was due to elevated geopolitical risks as the situation with North Korea continued to escalate as the country becomes even more isolated than it already was.

 

Hybrid model performance and update

For the shortened trading week ending on 4/13/2017, returns in the hybrid hypothetical models* (net of a 1% annual management fee) were as follows:

 

  Last Week 2017 YTD Since 6/30/2015
Aggressive Model -0.41% 2.29% 7.74%
Aggressive Benchmark -0.52% 4.88% 4.68%
Growth Model -0.25% 2.44% 7.02%
Growth Benchmark -0.40% 3.81% 3.96%
Moderate Model -0.11% 2.37% 6.07%
Moderate Benchmark -0.28% 2.75% 3.13%
Income Model 0.02% 2.57% 6.09%
Income Benchmark -0.13% 1.45% 1.93%
Quant Model -1.30% 6.23%
S&P 500 -1.13% 4.03% 12.89%

*Model performance does not represent any specific account performance but rather a model of holdings based on risk levels that are like my actual holdings, the hypothetical models are rebalanced daily to model targets.

 

There were no changes to the hybrid models over the course of the previous week. Many of the defensive positions held in the models provided the anticipated returns associated with the flight toward safety during a week that saw the overall markets move lower. The models remain almost fully invested with a small hedging position in place to help protect against broad market declines.

 

Market Statistics:

 

The short week last week saw a continuation of the declines that started two weeks ago in the markets:

 

Index Change Volume
Dow -0.98% Average
S&P 500 -1.13% Below Average
NASDAQ -1.24% Average

 

The “risk-off trade” seemed to be in full force last week when looking at the performance of the NASDAQ relative to the other two indexes. The movement of the three major indexes seemed to signal that investors were pulling money out of the markets and choosing to hold either cash or fixed income investments for the long weekend with the uncertainty surrounding the situation with North Korea. Volume continued to be at or slightly below average, as it has now been for most of 2017, after taking into account the four-day trading week.

 

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
Global Real Estate 1.58%   Financial Services -2.68%
Telecommunications 0.63%   Basic Materials -2.74%
Consumer Staples 0.54%   Broker Dealers -2.87%
Home Construction 0.54%   Regional Banks -3.26%
Infrastructure 0.42%   Semiconductors -3.91%

 

When looking at the movements of the various sectors of the markets last week, the “risk-off trade” was very apparent. Defensive sectors of the market took all five of the top performing sectors last week with Global Real Estate taking the top spot, while Telecommunications, Consumer Staples, Home Construction and Infrastructure rounded out the list. Each of these sectors are defensive in nature and demonstrate investors wanting to remain in the markets, but at the same time wanting to take on less overall risk than the broad markets. With defensive sectors doing so well last week, investors had to be pulling money from other sectors of the markets to buy the defensive sectors. The sectors that saw the most selling can be found in the bottom 5 performing sectors table. Financials took three of the five bottom performing sectors last week over fears that financial industry reform may take longer than anticipated. Semiconductors turned in the worst performance of the week last week, falling almost four percent as investors appeared to be booking profit from the sector’s large run up of the past several months.

 

Fixed income markets rallied higher last week, which pushed the yields lower across the board. This seemed to be due to some of the negative economic data released throughout the week, which could make it difficult for the US Fed to actually follow through with the expected rate hikes later this year. More on this below in the economic release calendar section.

 

Fixed Income Change
Long (20+ years) 2.29%
Middle (7-10 years) 1.26%
Short (less than 1 year) 0.05%
TIPS 0.77%

Global currency trading volume was below average last week as many markets around the world observed a holiday during the trading week. Overall, the US dollar declined 0.65 percent against a basket of international currencies as both the yen and the pound saw rebounds against the dollar after having consistently declined for the past few weeks. Much of the decline in the US dollar last week can also be attributed to comments by President Trump when he said that the US dollar was too strong early in the week. He of course reversed course on this comment later in the week, but much of the decline had already occurred. The best performing of the global currencies last week was the South African Rand, which gained 2.3 percent against the value of the US dollar. The worst performance among the global currencies was the Venezuelan Bolivar, with a decline of 1.5 percent over mounting fears of ongoing political uncertainty within the country.

Commodities were all higher last week, except for Copper, which declined on global demand concerns:

Metals Change   Commodities Change
Gold 2.63%   Oil 1.55%
Silver 2.94%   Livestock 1.34%
Copper -3.24%   Grains 2.15%
      Agriculture 0.61%

The overall Goldman Sachs Commodity Index advanced 1.00 percent last week. Oil gained 1.55 percent last week with political fears continuing to be the primary driver of the price movement. Metals were mixed last week with Gold and Silver both seeing solid gains due to the flight to safety trade broadly seen in the markets. Gold advanced 2.63 percent, while Silver increased 2.94 percent and the more industrially used Copper fell 3.24 percent. Soft commodities were positive last week, with Agriculture gaining 0.61 percent, while Livestock gained 1.34 percent and Grains posted a gain of 2.15 percent.

Top 2 Indexes Country Change   Bottom 2 Indexes Country Change
Caracas General Venezuela 2.21%   FTSE MIB Italy -2.59%
Colombo Stock Exchange Sri Lanka 1.75%   Sao Paulo Bovespa Brazil -2.74%

Last week was a difficult week for global financial markets as only 31 percent of the markets posted gains over the course of the week. The best performing index last week was found in Venezuela for the third week in a row, as the Caracas General Index turned in a gain of 2.21 percent for the week. Much of these gains, considering the political situation in Venezuela, can be attributed to the decline in the local currency last week, which made the local markets cheaper to outside investors. The worst performing index last week was found in Brazil and was the Sao Paulo based Bovespa Index, which turned in a loss of 2.74 percent.

The VIX seemed to come to life last week as the markets meandered lower for the week. On the last three days of trading last week the VIX jumped higher. Overall, the VIX gained more than 24 percent last week, giving it the largest weekly gain that we have seen on the index since just before the election in early November 2016. Historically, once the VIX starts to move by substantial amounts on a weekly basis, there is more volatility to come, both in the VIX and the markets. Very rarely does the VIX move one week and then move right back down and remain docile for an extended period following. Most of the move in the VIX last week can be attributed to the uncertainty over the situation in North Korea, discussed above in the international section of this commentary. The current reading of 15.96 implies that a move of 4.61 percent is likely to occur over the next 30 days. The direction of the move over the next 30 days is unknown.

Economic Release Calendar:

 

Last week was a slow week for economic news releases, but it felt like a normal week due to the short trading week with Friday being a holiday. Overall, it was a very negative week for the economic news releases when compared to market expectations:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Negative 4/13/2017 PPI March 2017 -0.10% 0.00%
Neutral 4/13/2017 Core PPI March 2017 0.30% 0.20%
Neutral 4/13/2017 University of Michigan Consumer Sentiment Index April 2017 98.0 96.3
Negative 4/14/2017 Retail Sales March 2017 -0.20% -0.10%
Slightly Negative 4/14/2017 Retail Sales ex-auto March 2017 0.00% 0.20%
Negative 4/14/2017 CPI March 2017 -0.30% 0.00%
Negative 4/14/2017 Core CPI March 2017 -0.10% 0.20%

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

 

Last week the economic news releases started on Thursday with the release of the Producer Price Index (PPI) for the month of March, which came in negative, posting a -0.1 percent overall, which signals that prices at the producer level declined in March when compared to February. The Core PPI managed to stay positive as it posted a 0.3 percent increase during the month. This negative PPI reading at the producer level could apply pressure against the Fed increasing rates again anytime soon. Later during the day on Thursday, the University of Michigan released its latest consumer sentiment index, which showed a small gain for the beginning of April reading when compared to the mid-March reading. The market seemed to not react much at all to this release. On Friday, while the overall financial markets were closed, the government released the latest reading on retail sales and the Consumer Price Index (CPI), both of which showed disappointing results. On the retail sales figure, overall sales were shown to have decreased by 0.2 percent during March, while retail sales excluding auto sales were flat, printing a zero change for the month. The Consumer Price Index released on Friday held more problems for the Fed as overall prices at the consumer level decreased by 0.3 percent, while the core CPI figure decreased by 0.1 percent during March. If we start to see consecutive months of declining prices, both at the producer and consumer level, it becomes unlikely that the Fed will be able to increase rates as doing so typically has a downward effect on inflation.

 

This week is a slow week for economic news releases in terms of the overall number of releases, with only two releases that could have a noticeable impact on the overall markets:

 

Date Release Release Range Market Expectation
4/17/2017 Empire Manufacturing April 2017 13.00
4/18/2017 Housing Starts March 2017 1260K
4/18/2017 Building Permits March 2017 1240K
4/20/2017 Philadelphia Fed April 2017 21.8
4/21/2017 Existing Home Sales March 2017 5.55M

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

 

This week the economic news releases start on Monday with the release of the Empire Manufacturing index for the month of April, which is expected to show that manufacturing in the US increased during the month, but at a slower pace than it did in March. On Tuesday, the first of the housing related news releases for the month of March are set to be released, with the housing starts and building permits being released. Both figures are expected to post a reading of about 1.2 million units, which would signal that the US housing market remains healthy. On Thursday, the Philadelphia Fed releases its latest index on business conditions, which is expected to show an increase but, much like the Empire release earlier in the week, at a slower pace than was seen in March. Wrapping up the week this week on Friday is the release of the existing home sales figure for the month of March, which is expected to show 5.5 million homes were sold during the month of March, which is middle of the road in terms of monthly home sales. In addition to the scheduled economic news releases, there is also a planned OPEC meeting for April 22nd that could have an impact on the global price of oil if they announce any kind of major change in policy.

 

Interesting Fact Tax history

 

Tax Day here in the US is tomorrow and so it seemed appropriate that today’s interesting fact be about taxes. The tax filing deadline has changed several times through the year with the first deadline back in 1913 being March 1st, which was agreed upon in the 16th amendment, when incomes were taxed for anyone making more than $4,000. That year, only 358,000 Americans filed a tax return, which was equal to about 0.4 percent of the population. In 1918, the deadline was moved back to March 15th, and the highest marginal tax rate was 77percent. In 1954, President Eisenhower asked Congress to change the tax code and one of the changes was moving the filing deadline back to April 15th. This year, the deadline is April 18th because the 15th fell on a Saturday and Monday the 17th is Emancipation Day in Washington DC, which is a holiday.

 

Source: http://www.thebalance.com

For a PDF version of the below commentary please click here Weekly Letter 4-10-2017

Commentary quick take:

 

  • Major developments:
    • Lack of market direction last week
    • US FOMC meeting minutes were released
    • President Trump met his Chinese counterpart

 

  • US:
    • FOMC minutes
      • Fed likely to shrink balance sheet
      • No material changes to outlook
    • US military strikes Syria
    • First quarter earnings season about to start
    • Earnings could see double digit growth
    • Unemployment improves to 4.5 percent

 

  • Global:
    • US-China
      • Trade deal outline started
      • 100 days to reach agreement
      • First meeting successful according to both sides
    • US moving into position near Korean peninsula

 

  • Technical market view:
    • All three indexes still in trading ranges
    • VIX near a potential turnaround point

 

  • Hybrid investments strategy update:
    • No changes last week

 

  • This week for the markets:
    • Slow week going into the Easter holiday
    • G7 meeting will be in focus

 

  • Interesting Fact: Where’s the beef?

 

Major theme of the markets last week: Fed minutes signal change is coming

Last week the major theme of the week was the change coming from the US Federal Reserve in terms of its balance sheet. It is well known that during the height of the Great Recession back in 2008 and early 2009 it was the actions taken by then Fed Chair Ben Bernanke that stopped the US economy from moving out of a Recession and into a Depression. Some of the actions that were undertaken at the time of the crisis included expanding the Fed’s balance sheet in a very large way, as depicted by the chart to the right. You can see the spike from under $1 trill to well over $2 trill very quickly in 2008, with the balance sheet slowly moving higher through the end of 2015 when the Fed stopped its asset purchase programs. Since the end of 2015, the Fed has been running a balance sheet of about $4.4 trillion and the time has come, according to the latest meeting minutes, for the Fed to start thinking about lowering its overall holding on the balance sheet. The Fed will do this by not reinvesting payments on the bonds as they come in, which will lead to a very slow downward trend developing over an extended period on the Fed’s balance sheet. The question, however, becomes whether the financial markets here in the US are ready for the Fed to step back and no longer support the markets. If Wednesday is any indication, it appears the US markets are ready to operate on their own as the Fed shirks its balance sheet, but only time will tell for sure.

 

US news impacting the financial markets:

 

The major focus of the US markets, during the otherwise slow week for financial news, was on the minutes from the latest FOMC meeting held in March that resulted in the first interest rate hike of 2017. There were a few differences in March’s meting minutes that were not present in previous minutes with the biggest difference being a discussion about the Fed gradually reducing its balance sheet of investments that built up over the past several years through the Fed’s various bond buying programs. The minutes indicate that members of the Fed would rather “phase out” reinvesting payments than abruptly stopping then all together. When the meeting minutes were released, the US financial markets moved lower as this was the first mention of the Fed starting to decrease the size of its balance sheet, a topic that had been hotly debated in the financial world. From the minutes, it appears the Fed will outline exactly how it will unwind its balance sheet well in advance of doing so to limit the impact of the movement on the fixed income markets. In addition to the markets reacting to the FOMC meeting minutes, they also built up anticipation about the upcoming earnings season of the first quarter of 2017, which officially starts this week.

 

This week is the first official week for first quarter 2017 earnings to be reported with financials being the major sector to release a considerable number of earnings reports this week. The table below shows the companies that have the greatest potential to move the markets highlighted in green:

 

Citigroup Fastenal Pier 1 Imports
Commerce Bancshares Infosys PNC Financial
Delta Air Lines JPMorgan Chase Wells Fargo

 

With the big three financial institutions Citigroup, JP Morgan Chase and Wells Fargo all releasing earnings this week, the tone for the quarter’s earnings season could be set very early. Missing from the list this week is Alcoa, which last quarter announced that it would no longer be releasing its earnings report early in the earnings season, leaving Fastenal (FAST) to be the first of the major companies to report earnings, both for the fourth quarter of 2016 and the first quarter of 2017. Maybe FAST will become the bellwether company for earnings season, much like Alcoa was for many years.

 

According to the latest figures from Factset, expectations remain very high for the quarter with earnings expected to have grown by 9.1 percent. Historically, earning figures come in higher than expected by about 2.9 percent when looking at the last 5 years on average, meaning that we could easily see earnings for the first quarter increase by 10 percent or more. So far, there have been 111 companies that have issued guidance for the first quarter, with 79 companies (71 percent) issuing negative guidance, while 32 have issued positive guidance.

 

Toward the end of the week last week, the global markets absorbed the political shock that the US had launched an airstrike on a military base in Syria after a suspected chemical weapons attack by the Syrian government earlier in the week. It was a little unusual that the global markets took the strike in stride, seeming unaffected by the change in stance on policy between the US and Syria. At this point, the strike seemed to be more of a warning to the Syrian government than anything else, but there is the possibility of the situation escalating if Russia continues to back Syrian President Assad. The biggest impact of the strike was seen in the movement of oil prices, which increased at the end of the week. With tensions between the US and Russia already strained by the accusations that Russia interfered in the US elections, this latest development in Syria is just one more potential flashpoint between the two countries.

 

Global news impacting the markets:

 

Global financial news last week focused on Central banks and the meeting between US President Trump and Chinese President Xi Jinping, which occurred at the end of the week and partially over the weekend. Last week there were two major central bank meetings, one in India and one in Australia. Both meetings ended with no change in the main policy rates, although India did raise a secondary rate by 0.25 percent. In addition to the meetings last week, the global financial markets also received the release of the latest Central Bank meeting minutes from both the US Fed and from the ECB. The meeting minutes from the US Fed were discussed above in the National news section. The ECB’s meeting minutes held nothing new from what President Draghi had covered during his lengthy press conference following the meeting. Inflation remains one of the principal areas of concern for the ECB, as it remains for many of the central banks around the world. The other major story line last week in the global media with the ongoing potential to impact the global financial markets was the meeting in Florida between President Trump and Chinese President Xi Jinping.

Late last week Chinese President Xi Jinping came to the US to meet one on one with US President Trump at Trump’s Florida resort Mar-a-Lago. The purpose of the face to face meeting was for both world leaders to personally get to know each other as well as to discuss North Korea and trade policies between the US and China. From most accounts of their time together, it seems the meeting was successful, with talks about trade being the most reported as the talks over North Korea were more private, but still likely very important. On trade, China looks to be ready to open its financial sector to more US investments and to open its beef market to more US beef exporters. With these two steps, it is thought that China could avoid a trade war with the US, which neither side really wants to see happen. While there is still an immense amount of work to be done surrounding a trade deal, both leaders agreed on the need to get something done within the next 100 days, so we will have to wait and see what materializes from the negotiations. On the North Korean front, all that was reported about the meeting was that President Trump told President Jinping that the US will act alone against North Korea if it has to. China is North Korea’s only major trading partner and quasi friend in the world; it is because of China enabling the leadership in North Korea that the country has been able to continue to operate relatively unaffected by the international community’s continued sanctions.

 

Technical market review:

 

Over the course of last week, all three of the major US indexes stayed within their respective trading ranges with two indexes near the bottom of the range and one near the top. In the charts below, the green lines are the major indexes, while the yellow lines are the most recent trading ranges for each of the indexes. The red line on the VIX chart remains the 52-week average level of the VIX, which the index remains solidly below.

The NASDAQ (lower left pane above) is the strongest of the three major indexes as it remains in the upper half of its trading range. Both the S&P 500 and the Dow are tied in terms of technical strength when looking at their respective trading ranges with both indexes bouncing along the lower bound. The VIX (lower right pane above) had a week of consolidation last week as it moved slightly higher for the week and ended near the point it has turned down from two previous times in the last two months. However, at this point it seems there are enough potential geopolitical mishaps that could occur in the near term that the VIX may stay around the current levels and not dive back below 12.

 

Hybrid model performance and update

For the trading week ending on 4/7/2017, returns in the hybrid hypothetical models* (net of a 1% annual management fee) were as follows:

 

  Last Week 2017 YTD Since 6/30/2015
Aggressive Model -0.11% 2.70% 8.17%
Aggressive Benchmark -0.32% 5.43% 5.23%
Growth Model -0.11% 2.69% 7.29%
Growth Benchmark -0.24% 4.23% 4.38%
Moderate Model -0.09% 2.48% 6.18%
Moderate Benchmark -0.17% 3.05% 3.42%
Income Model -0.06% 2.56% 6.07%
Income Benchmark -0.08% 1.58% 2.06%
Quant Model -0.35% 7.63%
S&P 500 -0.30% 5.21% 14.17%

*Model performance does not represent any specific account performance but rather a model of holdings based on risk levels that are like my actual holdings, the hypothetical models are rebalanced daily to model targets.

 

There were no changes to the hybrid models over the course of the past week, but there is a correction to be made in the commentary about the purchase of Southwest Airlines last week. Last week I said that Southwest had a fleet of “787s” when in fact its fleet is all 737s, not 787s. Being 737s as opposed to 787s gives the company the ability to land at smaller airports around the US when compared to the limited number of airports that have runways long enough for the 787 to land and take off from. By having all 737s in its fleet, Southwest is also able to more quickly service and make repairs on planes, as many of the planes are interchangeable between 737 models. The hybrid models remain nearly fully invested with a significant weighting toward ETFs and individual equity positions.

 

Market Statistics:

 

Last week was an uneventful week in terms of market movements as the markets here in the US lacked a general sense of direction:

 

Index Change Volume
Dow -0.03% Average
S&P 500 -0.30% Average
NASDAQ -0.57% Average

 

A little profit taking was evident by the significantly lower performance of the NASDAQ relative to the other two indexes after the NASDAQ had been the best performing index of the year. This movement was largely short-term profit taking and likely not part of a bigger trend. Volume continued to be at or slightly below average, as it has been now for most of 2017.

 

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
Telecommunications 2.72%   Semiconductors -1.24%
Residential Real Estate 1.62%   Regional Banks -1.34%
Pharmaceuticals 0.97%   Financials -1.41%
Energy 0.93%   Broker Dealers -1.56%
Aerospace & Defense 0.58%   Multimedia Networking -2.00%

 

The top performing sector being Telecommunications last week is not surprising, as investors looking for a deal moved into the sector after it was the second worst performing sector two weeks ago. Residential Real Estate continues to see robust returns as expectations continue to run high for real estate in 2017. Pharmaceuticals took the third spot after being stuck in sideways movements since the middle of February. Energy got a boost from rising oil prices last week as the sector overall gained 0.93 percent. Coming in 5th last week in terms of sector performance was Aerospace and Defense, which saw gains on Friday after the announcement of the strike by the US in Syria and the movement of several US navy ships to the Korean peninsula. On the negative side last week, two technology sectors and three financial related sectors made up the list. Multimedia Networking was at the bottom after falling a full two percent. Financials made up the next three spots as deregulation of the industry seems like it could be more of a fight on Capitol Hill than first thought. Semiconductors took the final spot of the negative performing sectors last week as investors seemed to be heavily selling profits in the sector.

 

Fixed income markets moved very little on the announcement of the Fed thinking about shrinking its balance sheet, which was a good sign that there may not be a rout in the fixed income market when the Fed is not there. The other side of that coin, however, is the thinking that the Fed may say it wants to shrink its balance sheet, but that it will not be able to do so any time soon:

 

Fixed Income Change
Long (20+ years) 0.21%
Middle (7-10 years) 0.17%
Short (less than 1 year) -0.04%
TIPS -0.26%

Global currency trading volume was below average last week as there was little additional information for traders to mull over. Overall, the US dollar advanced 0.77 percent against a basket of international currencies as investors seem to be taking the developments late in the week about the US and China in stride. The best performing of the global currencies last week was the Czechoslovakian Koruna, which gained 1.1 percent against the value of the US dollar. The worst performance among the global currencies was the Turkish Lira, with a decline of 2.6 percent over mounting fears of violence escalating in the region now that the US has hit Syria.

Commodities were mixed last week. Oil made it two weeks in a row of gains, while other commodities movements were mixed:

Metals Change   Commodities Change
Gold 0.62%   Oil 3.01%
Silver -1.28%   Livestock 0.27%
Copper -0.53%   Grains -0.65%
      Agriculture -1.01%

The overall Goldman Sachs Commodity Index advanced 1.35 percent last week, thanks to the gain in the price of oil and the index being a production weight index. Oil gained 3.01 percent last week on fears of the situation in Syria spilling over into other areas of the Middle East and potentially adversely impacting oil shipments from the region. Metals were mixed last week with Gold being the lone gainer, advancing 0.62 percent, while Silver decreased 1.28 percent and the more industrially used Copper fell 0.53 percent. Soft commodities were mixed last week, with Agriculture falling 1.01 percent, while Livestock gained 0.27 percent and Grains posted a loss of only 0.65 percent.

Top 2 Indexes Country Change   Bottom 2 Indexes Country Change
Caracas General Venezuela 4.87%   FTSE MIB Italy -0.94%
Colombo Stock Exchange Sri Lanka 3.81%   Topix Index Japan -1.51%

Last week was a mixed week for global financial markets as 60 percent of the markets posted gains over the course of the week. The best performing index last week was found in Venezuela for the second week in a row, as the Caracas General Index turned in a gain of 4.87 percent for the week. These gains in Venezuela continue despite the ongoing unrest within the country as the people lash out at the corruption within the current administration. The worst performing index last week was found in Japan, the Topix Index, which turned in a loss of 1.51 percent.

Last week the VIX advanced 4.04 percent, during a week that saw continued muted trading overall. As mentioned above, we are near the level that we have seen the VIX turn around and push lower two times previously, but this time it looks like the VIX could have reasons for staying near the current levels. Despite being near an inflection point from the recent past, the VIX is still very low by historical standards. The current reading of 12.87 implies that a move of 3.72 percent is likely to occur over the next 30 days. The direction of the move over the next 30 days is unknown.

Economic Release Calendar:

 

Last week was a slow week for economic news releases as there were very few releases. The primary focus of the releases last week was the US labor market, with some figures coming in better than expected (highlighted in green below) and some missing expectations (highlighted in red below):

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Neutral 4/3/2017 ISM Index March 2017 57.2 57.0
Neutral 4/5/2017 ADP Employment Change March 2017 263K 200K
Neutral 4/5/2017 ISM Services March 2017 55.2 57.0
Negative 4/7/2017 Nonfarm Payrolls March 2017 98K 180K
Negative 4/7/2017 Nonfarm Private Payrolls March 2017 89K 180K
Positive 4/7/2017 Unemployment Rate March 2017 4.50% 4.70%

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

 

Last week, the economic news releases started on Monday with the release of the ISM index for the month of March, which came in almost exactly at the expected level of 57.0, indicating that manufacturing here in the US continues to increase at a good, but not too fast, pace. On Wednesday, the first of the employment related releases of the week was released with the ADP Employment change for the month of March, which indicated that 263,000 jobs had been created during the month. This was better than anticipated and gave no indication that revisions to the downside were needed for the end of the week employment related releases. Also, released on Wednesday was the services side of the ISM index, which much like the overall ISM index released on Monday came in very close to expectations. On Friday, the government released its latest trove of data related to the labor market here in the US. Overall, the unemployment rate declined from 4.7 to 4.5 percent during the month of March, while at the same time the labor force participation rate remained constant at 63 percent. The payroll figures were dismal, with both private and public payroll figures missing by nearly 100,000 jobs. Average hourly earnings also disappointed as incomes were shown to have risen by only 0.2 percent during the month, versus the previous month’s 0.3 percent increase. While the numbers were not great in the payroll figures, everything else looked okay and did not signal that the Fed should change any of its policies based on this new data.

 

This week is a slow week for economic news releases in terms of the overall number of releases, with only two releases that could have a noticeable impact on the overall markets:

 

Date Release Release Range Market Expectation
4/13/2017 PPI March 2017 0.00%
4/13/2017 Core PPI March 2017 0.20%
4/13/2017 University of Michigan Consumer Sentiment Index April 2017 96.3
4/14/2017 Retail Sales March 2017 -0.10%
4/14/2017 Retail Sales ex-auto March 2017 0.20%
4/14/2017 CPI March 2017 0.00%
4/14/2017 Core CPI March 2017 0.20%

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

 

This week the economic news releases start on Thursday with the release of the Producer Price Index (PPI), both overall and as a core calculation. Expectations are for both readings to be very close to zero; if we see either figure dip below zero we could get a little market reaction, but otherwise these releases will largely be ignored. On Thursday, this week the University of Michigan is releasing its Consumer Sentiment Index for the month of April (preliminary results). Expectations are for almost no change when compared to the mid-March reading. On Friday, retail sales for the month of March are set to be released with expectations of an overall decline of one tenth of a percent, while retail sales excluding autos is expected to post a measly 0.2 percent increase. There continues to be a bifurcation between the consumer confidence levels being seen and consumer spending. The US economy needs to see spending pick up to a level consistent with the current elevated level of confidence or the consumer will not be able to keep the economy growing at the slow rate it has been for the past several years. Wrapping up the week on Friday is the release of the Consumer Price Index (CPI) for the month of March, which like the PPI earlier in the week is expected to post figures that are very close to zero when looking at overall consumer prices and only slightly above zero when looking at the core calculation. In addition to the above economic news releases, there are also three Fed speeches scheduled this week, including one by Chair Yellen that the market will likely be watching very closely.

 

Interesting Fact Beef exports: what’s at stake?

 

China’s beef imports seemed to plateau in 2014, with both volume (317,119 metric tons) and value ($1.35 billion) increasing only slightly over 2013. But through the first 10 months of 2015, China’s imports showed renewed momentum, with volume up nearly 40% from 2014 and value soaring by 58% to $1.8 billion. That said, about one million additional tons of beef are imported through informal channels, bringing the total beef import market to more than $5 billion.

 

Sources: Beefmagazine.com, University of Queensland, Own Calculations