For a PDF of the below commentary please click here Weekly Letter 5-23-2016

Commentary quick take:

 

  • Market statistics:
    • US markets were mixed last week
    • “Risk-On” trade permeated throughout the markets
    • Earnings season held steady as we move into the final weeks
    • VIX had the second calmest week of the year so far

 

  • US Federal Reserve was the focal point of the market last week:
    • June rate hike on the table
    • Risky timing of the June meeting
    • Chance of a rate hike in June skyrocketed

 

  • Earnings season in the US continues to drag out:
    • Mixed pictures from the US retail industry
    • Wal-Mart handily beat market expectations
    • Earnings remain lackluster, but not negative
    • Deep discount retailers report earnings this week
    • Expectations for the second quarter of 2016 earnings remain negative

 

  • Global news affecting markets was highly variable:
    • China only posted a 10.1 percent gain in retail sales (disappointed)
    • Japan saw deflation continue as the PPI printed a -4.2 percent for April
    • Low price inflation was seen in Europe

 

  • Technical market view:
    • The Dow broke down last week
    • S&P 500 and NASDAQ remain range bound
    • VIX is slightly elevated compared to the past few weeks, but still low historically

 

  • Hybrid investments strategy update:
    • Defensive positioning was drug down with the “risk-on” trade last week
    • Earnings of the underlying stocks were good; market reaction was mixed

 

  • Economic news releases:
    • Last week the economic news releases came in worse than expected
    • Manufacturing in New York and Philly contracted in May
    • This week the focus will be on US GDP

 

  • This week for the markets:
    • G7 meeting in Japan at the end of the week
    • Global markets will remain nervous
    • Earnings season here in the US concludes this week

 

  • Interesting Fact: Holdings of U.S. Debt

 

Major theme of the markets last week:

Fed hike

The major theme last week for the global and US financial markets was the US Federal Reserve and its upcoming meeting in June. Speculation about the timing of the next interest rate hike was front and center after the release of the meeting minutes from the previous meeting and several key FOMC member speeches, which all sounded very hawkish. Putting the potential for an interest rate hike in June fully on the table left investors at both the institutional and individual levels scrambling to make sure their holdings were ready for a rate hike in the very near future. This type of a rotation pushed investors out of interest rate sensitive investments and into more risky investments. Yet, when the meeting minutes are examined a little more closely, we see that while the language has changed, the Fed still reiterated that it is watching the same data points and remains data dependent for the timing of the next move. Curiously enough, the conclusion of the next Fed meeting is on Wednesday, June 15th, which is only one week ahead of the Brexit vote in the UK. Will the Fed really increase interest rates at a time when the markets will already be jumpy about the possibility of the Brexit vote in favor of the UK leaving the EU?

 

US news impacting the financial markets:

 

The news that was the most impactful on the US financial markets last week came in the form of the minutes released from the previous FOMC meeting. The April FOMC meeting minutes were released on Wednesday last week and held all of the discussion points from the previous FOMC meeting, including what the Fed is thinking about the timing of a future interest rate hike. Going into the meeting there was little thought that interest rates would be increased at the June meeting, but after the minutes came out the odds of a rate hike in June dramatically increased. The table to the right shows just how much the odds of a rate hike increased over the course of the previous week. This time last week there was only a 4 percent chance of a rate hike at the June meeting and one had to look out to the December meeting before there was even a higher than 50 percent chance of a rate hike by the Fed. Now the odds of a June hike have jumped to 26 percent and you only have to go out to the July meeting to find the first meeting with a 50 percent or higher chance of a rate hike. So what changed? Nothing much actually changed. The Fed continued to reiterate that it is data dependent and that the data is becoming strong enough to justify a rate hike, despite the general lack of inflation at the 2 percent target goal. In addition to the meeting minutes being released last week, there were also a few key speeches by Fed officials, which stated that a June rate hike is on the table and likely if the data stays the same. The key pieces of data that the Fed is watching are indicators related to price stability and the labor market. The labor market is certainly at a level consistent with the Fed being able to raise rates and the price stability mandate has been fulfilled, even if we are seeing lower inflation than the 2 percent target rate. The labor market figures released by the government at the end of next week and the inflation related figures released in three weeks will be the driving factors on hiking interest rates or not. However, unlike previous meeting minutes, this latest meeting made it seem like interest rates would be increased if the data does not get worse, whereas previously the statement made investors feel that rates would be increased if the data improved. In addition to the Fed, the US financial markets were also keenly watching the tail end of earnings season for the first quarter of 2016, especially the retailers, which had seen releases with mixed results going into last week.Fed watch 5-23-16

 

All eyes watching earnings season were on Wal-Mart last week as the company bucked the trend of weakness that had been established for the quarter in the retail sector with a strong earnings report. 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:

 

Advance Auto Parts -4% Flowers Foods -3% Salesforce.com 0%
Agilent Technologies 13% Foot Locker -1% Shoe Carnival -3%
Campbell Soup 0% Home Depot 7% Target Corp 8%
Cisco Systems 0% Hormel Foods 5% TJX Companies 9%
Deere & Co 7% Red Robin Gourmet Burgers 15% Wal-Mart Stores 11%
Dollar Tree pushed Ross Stores 0% Williams-Sonoma pushed

 

Retailers continued to see very mixed results last week in their earnings. Target was the first of the major retailers to release earnings last week and reported results that beat the very low expectations of Wall Street, but several of the numbers released showed weakness at the company, resulting in the stock falling by almost 8 percent on the next trading day. This led to some fear over what may lie in the results of Wal-Mart, the world’s largest private employer, the next day, but to many people’s surprise, Wal-Mart posted one of its best quarters of the past 5 years. With all common metrics showing improvement and the majority beating expectations, Wal-Mart was rewarded with a gain of almost 10 percent on the trading day following its announcement. Home Depot posted solid gains during the first quarter of 2016, thanks to a steady real estate market and a relatively mild winter in many parts of the US.

 

According to Factset Research, we have seen 478 (95 percent) of the S&P 500 companies release their results for the first quarter of 2016. Of the 478 that have released, 71 percent have met or beaten earnings estimates, while 29 percent have fallen short of expectations. When looking at revenue of the companies that have reported, 53 percent of the companies have beaten estimates, while 47 percent have fallen short. Both the earnings per share and revenues figures held steady last week, as expected with such a large percentage of companies having already reported. In aggregate, earnings for the S&P 500 have declined by 6.8 percent on a year-over-year basis through first quarter 2016. This showed a slight improvement over the decline of 7.1 percent last week with some of the positive change coming from Wal-Mart’s earnings. According to Factset analysts, the expectations going forward for the S&P 500 are that projected earnings and revenue growth will not turn positive until the third quarter of this year. Materials and Consumer Staples are the two best performing sectors of the markets in terms of companies beating expectations, while Energy and Utilities are the two worst performing sectors in terms of the percentages of companies beating expectations.

 

Looking forward, there have been 103 companies that have issued forward guidance for the next quarter and the rest of the year with 73 of them having issued negative guidance, while 30 have issued positive guidance. While this may seem like a large number of companies that have issued negative guidance for the second quarter, it should not be very concerning as corporate American has a tendency to lower guidance so much that it becomes much easier for the companies to “beat” their new lower expectations. If a company is releasing poor results for the quarter and knows its stock price is going to take a hit, it seems to pile on a little more bad news in terms of its outlook—getting all of the bad news out of the way at once!

 

This is the last week for a table with upcoming earnings results for the first quarter of 2016 as earnings season draws to a close. Retailers dominate the few well-known companies releasing earnings this week. The table below shows the companies that have the greatest potential to move the markets highlighted in green:

 

Abercrombie & Fitch Dollar Tree Seadrill Ltd
Best Buy DSW Sears
Big Lots Express Splunk
Bristow Group GUESS? Tiffany & Co
Costco Wholesale Intuit Toll Brothers
Dollar General Sanderson Farms Williams-Sonoma

 

Deep discount retailers always bring on the rear in terms of closing out earnings season for any given quarter. This week the deep discount retailers releasing earnings include Dollar Tree, Dollar General, Big Lots and DSW. While Wal-Mart posted good results for the first quarter of 2016 last week, it does not look like retail sales in general will be seen as strong during this week’s releases. One big data technology driven company that many investors will be watching this week is Splunk. Splunk is a very large big data and cloud computing company that is on the cutting edge of many technologies. The company is used as a proxy for many private companies in terms of trying to figure out how the largely private, high technology industry related to cloud computing is performing. It will be very interesting to see how some of the higher end retailers fared during the quarter with companies like Tiffany & Company as well as Guess, Express and Abercrombie & Fitch turning in their results. Expectations for all of these company are so low that even a slight surprise to the upside could results in a larger than normal movement in the underlying stock price.

 

Global news impacting the markets:

 

Last week, there was a wide variety of global news that had small impacts on the overall markets. China saw weakness in April in both retail sales and in industrial output as both figures missed market expectations. However, missing estimates in China is all relative as retail sales were shown to be up 10.1 percent on a year-over-year basis and industrial production was up 6 percent on a year-over-year basis. To the majority of countries in the world, posting numbers that high would be seen as positive, but as mentioned above, both of those figures were below market expectations.

 

News out of Japan last week was very negative after the government showed that prices at the producer level declined by 4.2 percent during the month of April. This poor data point was combined with a GDP print of only 0.4 percent during the first quarter of 2016, creating a bit of a problem for the Bank of Japan (BOJ). The BOJ has been trying to cope with falling prices and a weakening economy now for several years and thus far the majority of the stimulus packages attempted have failed. Abenomics had several different arrows in the plan and each only temporarily boosted the economy, primarily through devaluing the Yen, which helps to boost export business from Japan as its products are cheaper to foreign buyers. However, while boosting exports does help the economy, it does very little to actually make the economy self-sustaining, increasing the inherent risks to the overall economy while rendering it fully dependent on government stimulus for growth. The financial markets in Japan, however, turned in a positive week of performance because of the government’s seeming willingness to push out a sales tax increase in Japan that had initially been scheduled to kick in at the end of the month. Once again, this is not something that is sustainable, but the speculation did push the financial markets higher.

 

Europe was the other area of the world that made news last week as Eurostat released some of its latest data points on inflation within the Eurozone, which showed that prices declined on a year-over-year basis. The ECB also released the meeting minutes from its April meeting, but unlike the US FOMC meeting minutes, the minutes from the ECB meeting held nothing of substance; the fact that the ECB continues to struggle with price deflation is well known. The ECB meeting minutes also discussed the possibility of a Brexit in a very hypothetical way. Right now, the chance of a Brexit has been declining as the percentage of “stay” votes seems to be far outweighing the “leave” votes. We are now exactly one month away from the actual Brexit vote and it will likely be the focal point of European news over the coming month as pundits speculate about the potential impact of the Vote, should it turn out that the UK votes to leave the EU.

 

Technical market review:

 

There was one development last week in terms of technical changes to the three major US indexes; the Dow broke down below its most recent support level during the risk-on trade that occurred during the second half of the week last week. The charts below show each of the three major indexes, plus the VIX, drawn with green lines. The red lines on the three major indexes depict the closest resistance levels, as represented by points that have been tested on each index several times in the last 6 months. The blue lines represent the closest level of support for each of the indexes, established by points that in the past the markets have touched prior to bouncing higher. For the VIX, the red line remains the rolling 52-week average level of the VIX.

4 charts combined 5-23-16

As you can see above, the Dow (upper right pane above) had a little blip down below the blue (support) line and then made a valiant effort to get back to and above the blue line at the end of the week, falling only a little short. The S&P 500 (upper left pane above) moved down last week enough to touch the blue support line and then bounced higher, ending the week solidly above the support level. The NASDAQ (lower left pane above) continues to move in a sideways fashion with the lower bound it seems to be bouncing off of being the 4,700 level for the index. As you can see in the chart, the 4,700 level has now been tested several times in the past two weeks and each time the index has managed to bounce higher. In general, the movement last week was not concerning as the markets are in a position where they are unlikely to move up or down by a significant amount over the coming weeks. The markets continue to look perfectly content moving sideways. This theory is also confirmed by the generally low level of the VIX which, while it is higher than it has been for the past three weeks, remains very low relative to historical levels.
Market Statistics: Last week was a mixed week for the US indexes as two of the indexes moved higher during the week, while one pushed lower:

 

Index Change Volume
NASDAQ 1.10% Average
S&P 500 0.28% Average
Dow -0.20% Below Average

 

As mentioned above, last week was a “risk-on” trading week as the NASDAQ led the way higher, while the S&P was in the middle in terms of performance and the Dow finished well behind the other two indexes. The rotation out of low risk and into higher risk started in earnest on Wednesday after the release of the Fed minutes, as discussed above in the national news section. Volume overall last week was about average, but since we are starting to enter the summer trading season, it felt like there was more volume than there actually was.

 

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

 

Top 5 Sectors Change Bottom 5 Sectors Change
Semiconductors 5.03% Residential Real Estate -2.80%
Pharmaceuticals 4.84% Utilities -2.17%
Regional Banks 4.24% Gold -1.79%
Biotechnology 4.05% Consumer Goods -1.73%
Broker Dealers 2.84% Consumer Staples -1.42%

The “risk-on” trade was easily seen when looking at the sector performance last week. The highest risk sectors of the markets—Semiconductors, Pharmaceuticals, and Biotechnology—all made it into the top 5 performing sectors of the markets. The more safe-haven, lower risk sectors of the markets all saw negative returns as Real Estate, Utilities, Gold, Consumer Goods and Consumer Staples made up the bottom five performing sectors of the markets over the course of last week. While there is some continued risk to the safe haven assets going forward, much of the reaction last week to higher interest rates is done, as interest rates are expected to increase by a very small amount, relative to the yields seen on many of the stocks in the safe haven sectors of the markets.

Fixed income markets were down as bond traders and investors alike adjusted their positioning to the meeting minutes from the US Federal Reserve and the increased likelihood that rates will be increasing at the June meeting:

Fixed Income Change
Long (20+ years) -1.61%
Middle (7-10 years) -1.14%
Short (less than 1 year) -0.01%
TIPS -1.01%

Currency trading volume was above average last week as traders pushed up the value of the US dollar against almost all of the other global currencies. The US dollar increased by 0.82 percent against a basket of foreign currencies, as the dollar made it two weeks in a row of gains, leading some managers to call the bottom in the slide of the US dollar as being behind us. The best performance of the global currencies was the British Pound as it gained 0.90 percent against the value of the US dollar, thanks to the latest polls showing more people favoring staying in the EU than wanting to leave. The weakest of the major global currencies last week was the Swiss Franc as it declined by 1.61 percent against the value of the US dollar.

Commodities were mixed over the course of the previous week; the metals pushed lower, while the soft commodities were mixed:

Metals Change Commodities Change
Gold -1.64% Oil 3.34%
Silver -3.62% Livestock -2.07%
Copper -1.06% Grains 0.54%
Agriculture -0.71%

The overall Goldman Sachs Commodity Index advanced by 1.58 percent last week, as Oil increased 3.34 percent, making it two weeks in a row for oil gaining more than 3 percent each week. The major metals were negative last week with Gold declining 1.64 percent. The more industrially used Silver and Copper fell 3.62 and 1.06 percent, respectively. Much of the decline in the metals markets seemed to be due more to investors buying risky assets rather than a fundamental shift in the valuation of precious metals. Soft commodities were mixed last week with Livestock giving up 2.07 percent, while Grains increased 0.54 percent and Agriculture overall moved lower by 0.71 percent.

Last week was a mixed week for global equity market returns with about half of the major indexes pushing lower for the week, while half advanced. The best performing index last week was found in Japan, and was the Nikkei 225 Index, which turned in a gain of 2.0 percent, as the value of the Yen decline by 1.5 percent, helping to boost many of the stocks in the exporting of goods and services business in Japan. The worst performing index last week was found in the Philippines, and was the PSE Index, which turned in a loss of 1.9 percent after increasing more than 6 percent just two weeks ago. The increase in the PSE two weeks ago was due to exuberance about the new president being elected. Last week’s decline was due to the realization that a new present doesn’t necessarily mean that the economy will turn around on a dime.

The VIX last week continued to trade in a very unusual fashion, moving very little when looking at the intraweek movements and the overall movements on a weekly basis. The VIX increased by 1.06 percent last week, the second smallest weekly movement that we have seen on the VIX so far during 2016. Complacency seems to continue as the major theme of the VIX as even the fear of a rate hike in June didn’t seem to have much impact on the fear gauge. The current reading of 15.20 implies that a move of 4.39 percent is likely to occur over the next 30 days. As always, the direction of the move is unknown.

For the trading week ending on 5/20/2016, returns in the hybrid hypothetical models* (net of a 1% annual management fee) were as follows:

  Last Week 2016 YTD Since 6/30/2015
Aggressive Model -1.16 % 0.35 % 4.63 %
Aggressive Benchmark 0.08 % -1.17 % -6.20 %
Growth Model -1.15 % 0.41 % 3.74 %
Growth Benchmark 0.06  % -0.83 % -4.68  %
Moderate Model -1.15 % 0.49 % 3.22 %
Moderate Benchmark 0.05 % -0.52 % -3.22 %
Income Model -1.30 % 0.93 % 3.55 %
Income Benchmark 0.03 % -0.17 % -1.46 %
S&P 500 0.28 % 0.41 % -0.52 %

*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 in the hybrid model over the course of the previous week. Our defensive positing in the model came under pressure last week from two different sources. The first was the general “risk-on” trade seen in the markets after the Fed signaled that rates could be increasing at the June meeting of the FOMC. During risk-on trades, investors typically sell investments deemed safer than others and move into higher risk assets. The foundation of the stocks in the hybrid models is that the companies are solid companies that pay dividends and do not provide the same high levels of volatility of the markets over time. The stocks come in and out of favor very frequently; last week just happened to be a very pronounced out-of-favor week. The second factor that both helped and hurt returns was earnings season as Hormel (HRL) announced a solid quarter of growth, both in earnings per share and revenues, only to see its stock price slide by more than 8.5 percent, thanks to a very small decline in margins. Flower Foods (FLO) also released earnings last week and missed expectations by a penny on the earnings per share number, with revenues being in-line with expectations. Flower Foods also increased its guidance for the full year 2016 in terms of revenue and earnings and was rewarded with a gain of 3.5 percent the next day, which was almost enough to make up for the losses incurred by the stock the day prior to earnings being released. Wal-Mart (WMT), as mentioned above, was a bright spot in retail earnings season, a season that had very few bright spots. Wal-Mart beat on all of the common metrics used for evaluating earnings and looks well positioned to buck the trend of weakness in retail, as it looks to boost its online presence and in-store experience. We are now fully through earnings season for the underlying stocks that are owned in the hybrid models and should not see any further jolts, either positive or negative, unless a company makes an unexpected announcement. One such announcement was made last week by Church and Dwight (CHD) after the company announced that there was no planned sale of the company to Proctor and Gamble, as was being speculated on the web. The stock had been up by almost 9 percent, only to end the day slightly higher after the announcement by the company.

 

Economic Release Calendar: Last week was a slow week for economic news releases in terms of the number of releases, with the data overall coming in below market expectations. There were two releases that significantly missed market expectations (highlighted in red below) and none that significantly beat market expectations:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Negative 5/16/2016 Empire Manufacturing May 2016 -9 6.2
Neutral 5/17/2016 CPI April 2016 0.40% 0.30%
Neutral 5/17/2016 Core CPI April 2016 0.20% 0.20%
Neutral 5/17/2016 Housing Starts April 2016 1172K 1135K
Neutral 5/17/2016 Building Permits April 2016 1116K 1130K
Neutral 5/18/2016 FOMC Minutes April Meeting N/A N/A
Negative 5/19/2016 Philadelphia Fed May 2016 -1.8 2.7
Neutral 5/20/2016 Existing Home Sales April 2016 5.45M 5.40M

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

 

Manufacturing has once again stolen the spotlight in terms of economic indicators as the positive gains in manufacturing seen during the month April seem to be nothing more than blips in the data. Last week, the economic news releases started on Monday with the release of the Empire Manufacturing index for the month of May, which was expected to post a reading of 6.2 (a slow, but healthy, expansion in manufacturing). However, economists and investors were incorrect in their prediction as the index posted a -9.0 reading, signaling a relatively strong contraction in manufacturing in the greater New York area during the month. After so much weight was put on the “turn around” in manufacturing seen in April, this data point popped any hopes that manufacturing was indeed back to expansion. On Tuesday, the Consumer Price Index (CPI) was released and indicated that price inflation at the consumer level remains very low, much lower than the Fed would like to see at this stage in the economic recovery. Two pieces of housing data were also released on Tuesday—building permits and housing starts—both of which came in close to expectations and both well above the very important 1 million unit level. On Wednesday, as discussed at length above in the national news section, the FOMC released its meeting minutes from the previous meeting, which seemed to have a more hawkish sentiment than many people were expecting. On Thursday the poor manufacturing data out of New York was verified by a contraction in the Philadelphia Fed Index number as the index posted a reading of -1.8, while expectations had been for a positive 2.7 reading. Wrapping up the week last week was the release of existing home sales for the month of April, which came in at 5.45 million units, in line with expectations, thus having very little noticeable impact on the overall markets.

 

This week is another slow week for economic news releases, with the focus of the week being the US consumer:

 

Date Release Release Range Market Expectation
5/24/2016 New Home Sales April 2016 521K
5/26/2016 Durable Orders April 2016 0.60%
5/26/2016 Durable Orders, ex-transportation April 2016 0.50%
5/26/2016 Pending Home Sales April 2016 0.60%
5/27/2016 GDP – Second Estimate Q1 2016 0.90%
5/27/2016 Michigan Sentiment – Final May 2016 95.5

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, which is expected to be 521,000 units sold. This figure is middle-of-the-road and would signal a healthy, but not spectacular, housing market in the US for new homes. On Thursday, durable goods orders for the month of April are set to be released with expectations of a 0.6 percent overall reading, while orders excluding transportation are expected to post a gain of 0.5 percent. Both of these figures can be very volatile, so as long as the reading stays within 0.3 percent of the expected values there should be little market reaction. On Friday, a very important economic data point is released, that being the second estimate of first quarter GDP here in the US. Expectations are high on this release, hoping that we see GDP increase from 0.5 percent (first estimate) all of the way up to 0.9 percent now. This seems like a very tall order and the release will likely fall short, adding to the speculation about whether the Fed can afford to increase rates at the June meeting or not. Wrapping up the week this week for the economic news releases is the University of Michigan’s Consumer Sentiment Index for the month of May (final estimate), with expectations of very little change between the mid-month reading and this final reading. In addition to the economic news releases this week, there are also nine speeches being given by FOMC members that will be very closely watched by the markets, especially the speech by Chair Yellen on Friday morning.

 

Interesting Fact — Holdings of U.S. Debt

 

The Treasury Department released a breakdown of Saudi Arabia’s holdings of U.S. debt, after keeping the figures secret for more than four decades. The stockpile of holdings by the world’s biggest oil exporter stood at $116.8 billion as of March, a tally that ranks among the top dozen foreign nations in terms of holdings of U.S. debt, including China’s $1.3 trillion and Japan’s $1.1 trillion.

 

Source: Bloomberg

For a PDF version of the below commentary please click here http://wp.me/Ppr8Z-23

 

Commentary quick take:

  • Market statistics:
    • US markets were down last week
    • Investors continued to weigh a myriad of economic data
    • Earnings season held steady as we move into the final weeks
    • Summer seems to have started early for Wall Street

 

  • Summer is almost here for the markets:
    • Low volume trading is likely to persist for the next few months
    • Headline risk to the markets increases
    • Liquidity is slightly lower than in non-summer times
    • Summer historically is more about wealth preservation rather than wealth accumulation

 

  • Earnings season in the US pushed toward the finish line last week:
    • Many colors in the table of companies beating or falling short of expectations last week
    • More than 90 percent of first quarter reporting is completed
    • Earnings so far have been lackluster, but not negative
    • Walmart will be in focus this week for earnings
    • Expectations for the second quarter of 2016 earnings remain negative

 

  • Brazilian President Dilma Rousseff has been removed from office

 

  • Europe continues to look like a mess:
    • Industrial production numbers were dismal
    • Greece is still far from securing further bailout funds
    • Impact from a Brexit is currently being analyzed

 

  • Hybrid investments strategy update:
    • Returns were positive across all models last week
    • Increased defensive positioning in the models
    • Three of the individual stocks in the models report earning this coming week

 

  • Economic news releases:
    • Last week the economic news releases came in better than expected
    • This week the focus will be on housing and manufacturing

 

  • This week for the markets:
    • Several US Supreme Court decisions on a wide variety of cases will be handed down
    • Global markets will remain nervous
    • The end of earning season is in sight

 

  • Interesting Fact: The Evolving S&P 500

 

 


Major theme of the markets last week: Has summer started already?

 

Summer is typically a slow time for the financial markets here in the US as many of the large institutional investors take time off and there are few potentially impactful investment contexts unfolding, such a holiday spending or very snowy winters affecting retail sales. Summer is known for low volume, slightly less liquidity and high headline risk in the markets. Historically, summer is also a time when it is best to preserve wealth rather than try to accumulate it, as the “Sell in May and go away” saying alludes. The last several years summer has also been a time when the global financial media focuses its attention on Europe and what is happening with various struggling countries such as Greece and Spain. Last week it seemed summer trading started a few weeks early as there were few headlines that would normally move the markets and the media seemed to be recycling the same old stories of the past several weeks. With no catalyst to point to that would keep the markets pushing higher it was not surprising to see the broad indexes meander lower. The markets moved lower despite what was arguably the best monthly retail sales figure for the US that we have seen in the past two years. With investors looking to start summer early, the markets will likely meander aimlessly until some of the darker clouds on the horizon come to pass.

 

US news impacting the financial markets:

 

Last week was a slow week for news that was impacting the US financial markets. The focus of the news was primarily on the upcoming election during the first part of the week and then on the retail sales figures and earnings reports at the end of the week. Politics seemed to have little impact on the markets as we are still very far from the general election. Things that are too difficult to factor into the markets are largely being ignored. On Friday, retail sales for the US during the month of April were released and surprised everyone. The retail sales figure posted a gain of 1.3 percent, while the market had been anticipating a gain of only 0.7 percent. As you can see in the chart to the right, the April reading for retail sales was the highest reading we have seen on the index since April of 2014. You may also notice that April typically sees a large upward move in retail sales due to a number of factors, such as consumers getting ready for summer and the Easter holiday. One other factor that comes into play with the April retail sales figure is the seasonality adjustment the government applies to the raw retail sales data. There is a distinct upward bias during the month, but it is consistently applied over time so there is no unfair advantage in the data this year when compared to previous years. So why then, after such a good retail sales figure, are so many retailing CEOs and other corporate officers saying they don’t understand the data? The reason is that brick and mortar retail locations are having a difficult time selling products. Consumers seem to be favoring online shopping for goods, as is evident in the latest Amazon earnings reports as well as several other E-Commerce reports that show a lot of growth from online businesses. Services is the other aspect of the retail sales figure that comes into play when explaining why big box stores are not seeing increasing sales. This has to do with consumers choosing services rather than goods in the current environment. One other factor pertaining to retail sales that will become more of a factor going forward is the cost of gasoline and its potential negative impact on the economy. Consumers over the past 9 months have benefited from very low costs of oil and gas. The savings to consumers appears to have largely been used to pay down debt, rather than increase spending. Now, as oil ticks upward, prices at the pump may start to cut into consumers’ monthly budgets. Retail sales and speculation about spending was rampant in the news last week. The quarterly results were released as well.

retail sales 5-16-16

Last week was a fascinating week for earnings announcements as there were many retailers that simply did not see the strength that was announced in the retail sales figures discussed above. 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:

 

Allergan 2% J C Penney 20% Shake Shack 33%
Arctic Cat -51% Jack In The Box 21% SolarCity -11%
Brookdale Senior Living -2% Kohls -14% Sotheby’s -59%
Dean Foods 18% Liberty Media -40% Symantec -16%
Dillard’s -16% Macys 14% Tyson Foods 11%
Electronic Arts 27% Neenah Paper 11% Walt Disney -3%
Fossil Group 43% Nordstrom -42% Wendys 83%
Good Times Restaurants 29% Ralph Lauren 6% Xcel Energy 2%

 

If you have looked at previous weeks’ tables, you may have noted the large amount of color on the table this week. Companies in the table this week either really beat or really fell very short of expectations and there were few companies in the middle. Retail showed a very mixed bag last week as several of the higher end retailers such as Dillard’s, Nordstrom and Sotheby’s all posted much lower than expected results, while Macy’s managed to beat expectations. Lower end retailers were also mixed as JC Penny handedly beat very low expectations, while Kohl’s struggled. Reasons for underperformance at the retailers were abound with most citing the US shopper for why they missed expectations as savings seemed to be more important than spending, as mentioned above. Fast food was one very bright spot in the earnings announcements last week. Wendy’s, Good Times, Jack in the Box and Shake Shack all beat earning expectations by double digit percentages.

 

According to Factset Research, we have seen 458 (91 percent) of the S&P 500 companies release their results for the first quarter of 2016. Of the 458 that have released, 71 percent have met or beaten earnings estimates, while 29 percent have fallen short of expectations. When looking at revenue of the companies that have reported, 53 percent of the companies have beaten estimates, while 47 percent have fallen short. Both the earnings per share and revenues figures held steady last week, as expected with such a large percentage of companies having already reported. In aggregate, earnings for the S&P 500 have declined by 7.1 percent on a year over year basis through first quarter 2016. According to Factset analysts, the expectations going forward for the S&P 500 are that projected earnings and revenue growth will not turn positive until the third quarter of this year. Materials and Consumer Staples are the two best performing sectors of the markets in terms of companies beating expectations, while Energy and Utilities are the two worst performing sectors in terms of the percentages of companies beating expectations.

 

With such a large percentage of S&P 500 member companies having already reported earnings, it is becoming more and more difficult to see the overall numbers for the quarter change much beyond the current readings. Looking forward, there have been 83 companies that have issued forward guidance with 58 of them having issued negative guidance, while 25 having issued positive guidance for the next quarter and the rest of the year.

 

This week is the “cliff week” for the number of companies reporting earnings as there are only 508 companies in total releasing earnings, compared to the past few weeks when more than 1,500 per week have released their earnings. Retailers dominate the few well-known companies releasing earnings this week. The table below shows the companies that have the greatest potential to move the markets highlighted in green:

 

Advance Auto Parts Flowers Foods Salesforce.com
Agilent Technologies Foot Locker Shoe Carnival
Campbell Soup Home Depot Target Corp
Cisco Systems Hormel Foods TJX Companies
Deere & Co Red Robin Gourmet Burgers Wal-Mart Stores
Dollar Tree Ross Stores Williams-Sonoma

 

After such an interesting week for retailers last week, the markets will be very closely watching Wal-Mart this week as the world’s largest brick and mortar retailer releases its earnings. After looking at the divergence last week between high end and lower end retailers, it seems Wal-Mart could post a pretty good quarter as the lower end retailers of the spectrum did better than the higher end last week. Other retailers releasing this week that will be closely watched include Target, TJ MAXX and Ross. Deere & Co is another company that will be closely watched as its heavy machinery is used around the world for a wide variety of applications. Flower Foods releases earnings this week and it will be interesting to see how its integration of some of the Hostess assets and Dave’s Killer bread is going for the company. Remember, last quarter the company announced that costs were higher than anticipated during the quarter on the integrations and the stock moved notably lower.

 

Global news impacting the markets:

 

Global news last week focused primarily on two very different parts of the world, with the first being Brazil and the second being Europe. Brazil’s President Dilma Rousseff had been under fire for many months with allegations of corruption and the misuse of government funds. Last week one of the final steps was taken as the Brazilian Parliament voted to impeach her and removed her from office for the remaining duration of the trial. The Vice-President, who has remarkably stayed clean during this process, has assumed the office of the President and now has only a few months to try to turn the country around, ahead of the upcoming elections, which he will surely lose unless a lot of progress is quickly made. With the trial moving forward and a new president at the healm of the world’s ninth largest economy and 11th largest oil producer, the economy may start to turn around. Brazil is the largest economy in South America and is widely seen as the most advanced of the South American economies. A more stable government in Brazil could lead to much less uncertainty in the region and help boost the economy of Brazil as well as the region, especially as leadership in the region is greatly needed ahead of the future hardships anticipated in Venezuela over the coming months and years. The other news that had an impact on the global markets last week came out of Europe and it was not very positive.

 

The potential for a Brexit is still the main topic of discussion in the financial media as the vote is now just over a month away. If Britain decides to leave it could have long reaching impacts on the global financial markets, as one of the cornerstones of the EU would be missing. The risks to other countries choosing to leave the EU would also increase as nationalistic movements would surely pick up steam in many different countries. Global trade could also be impacted as new trade agreements would have to be drawn up, with each trading partner and other EU member countries potentially being disinclined to give Britain any of the favorable treatment the country enjoyed as a member of the EU. The latest odds online of a Brexit actually taking place still put the “stay” vote at about two thirds and the “go” vote at one third of the voting population. The full impact of the vote on the global financial markets has not yet been felt, but as we get closer to the vote it looks like this could become one of the catalysts for increased market volatility. Elsewhere in Europe, the data that came out last week pointed toward the continuation of a slow recovery in much of the region.

 

Industrial output for Europe was released last week by Eurostat and showed that industrial production for the EU overall decreased by 0.8 percent during the month of March to the lowest level since November of 2014. This comes at a time when other indicators are also showing relative weakness and the region as a whole is just starting to go through another round of negotiations with Greece for more bailout funds, as discussed in last week’s commentary. The IMF and Germany have indicated that the talks between Greece and its lenders did not go as well as they had hoped last week and it is unlikely that we will get any meaningful movement out of either side until we are closer to the deadline for when Greece has to make a multi-billion dollar payment to its creditors in July. Much like the Brexit, as mentioned above, the markets seem to be discounting the dangers that Greece and the negotiations pose to the global markets, but as we draw closer to the deadline for making the big payment, the global markets will likely increase in volatility much like they have the past several years around the Greece negotiations.

 

Technical market review:

 

With all three of the major indexes in the US moving lower last week, it was not surprising to see that all three indexes pushed further below their most recent technical support levels. The charts below show each of the three major indexes, plus the VIX, drawn with green lines. The red lines on the three major indexes depict the closest resistance levels, as represented by points that have been tested on each index several times in the last 6 months. The blue lines represent the closest level of support for each of the indexes, established by points that in the past the markets have touched prior to bouncing higher. For the VIX, the red line remains the rolling 52-week average level of the VIX.

4 charts combined 5-16-16

 

Technically, the markets broke down slightly last week, but they did so in lock-step, making none of the three indexes really appear that much better than the other two. The breakdown was also not significant when the VIX is examined as the VIX barely moved upward last week. It still looks like there is a high probability that the markets will remain range bound going forward and move in a sideways direction.

 

Market Statistics: Last week was a down week for the US indexes as all three moved lower during a week that seemed to lack much direction:

 

Index Change Volume
NASDAQ -0.39% Below Average
S&P 500 -0.51% Average
Dow -1.16% Way Below Average

 

Last week ended with all three indexes lower than they started the week, but during the week we saw a strong upward move early on followed by a fast downward move to end the week. Overall volume was lower than average, but if this was a middle of the summer week (which it felt like in the markets),  volume would have been about average. When looking at the three broad indexes it looks like last week was a little bit of a risk-on trade as the Dow turned in the worst performance, while the more technology heavy NASDAQ performed the best.

 

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

 

Top 5 Sectors Change Bottom 5 Sectors Change
Software 2.25% Transportation -2.98%
Global Real Estate 1.89% Materials -2.17%
Utilities 1.05% Healthcare Providers -2.09%
Insurance 0.97% Consumer Service -1.43%
Pharmaceuticals 0.87% Financial Services -1.17%

Software was the top performing sector last week, thanks in large part to great quarterly results being posted by Electronic Arts, which caused the heavily weighted stock (in the sector) to increase by more than 20 percent after the announcement. Continuing to perform well last week was Utilities, which came in third on the list of top performing sectors, as the sector continues to defy logic as it has gained more than 15 percent so far during 2016 as investors seem to be purchasing the sector for the dividends it pays out rather than for any fundamental reasons. On the negative side last week, Transportation was the worst performing sector thanks to rising oil costs and airlines coming under pressure from Congress. Several members of Congress called for airline companies to drop their checked bag fees in order to speed up security line wait times. If the airlines drop the fees, that would be giving up, by some estimates, more than a billion dollars of profits annually. Sectors related to the service sectors had a difficult week as both financial and consumer service sectors made the bottom five list.

Fixed income markets were mixed as bond traders and investors alike adjusted their positioning to the new economic data points released and updated their assumptions about when the US Federal Reserve would increase interest rates:

Fixed Income Change
Long (20+ years) 1.40%
Middle (7-10 years) 0.43%
Short (less than 1 year) -0.03%
TIPS 0.52%

Currency trading volume was average last week as there were very few market holidays globally during the week last week. The US dollar increased by 0.70 percent against a basket of foreign currencies as traders adjusted their positions to new retail sales data in the US that could impact when the Fed starts to increase interest rates. All of the major global currencies declined last week, for the second week in a row, against the US dollar with the best performance of the global currencies being the Canadian Dollar as it lost 0.08 percent against the value of the US dollar. The weakest of the major global currencies last week was the Swedish Krona as it declined by 1.69 percent against the value of the US dollar.

Commodities were mixed over the course of the previous week as all of the metals pushed lower, while most of the other commodities moved higher:

Metals Change Commodities Change
Gold -1.19% Oil 3.74%
Silver -2.10% Livestock 0.79%
Copper -4.05% Grains 3.25%
Agriculture 1.87%

The overall Goldman Sachs Commodity Index advanced by 2.57 percent last week, as Oil increased 3.74 percent with oil inventories here in the US decreasing much faster than anticipated in the weekly oil reserves data. The major metals were negative last week with Gold declining the least, giving up only 1.19 percent. The more industrially used Silver and Copper fell 2.10 and 4.05 percent, respectively, with global growth fears continuing to cause concerns over future demand for the metals. Soft commodities were all positive last week with Livestock gaining 0.79 percent, while Grains increased 3.25 percent and Agriculture overall moved higher by 1.87 percent.

Last week was a mixed week for global equity market returns with about half of the major indexes pushing lower for the week, while half advanced. The best performing index last week was found in the Philippines, and was the PSE Index, which turned in a gain of 6.4 percent, thanks to a new President being elected in the country that is much more focused on economic growth than the previous President. The worst performing index last week was found in China, and was the Shanghai Se Composite Index, which turned in a loss of 3 percent, as economic data coming out of the country continues to indicate that there is a large amount of weakness in the economy.

The VIX last week continued to trade in a very unusual fashion, moving opposite of how one would think it would on some days and on others presenting a much more magnified move than would have been expected. One reason for such erratic and uncharacteristic movements in the VIX is that there are many events that are just past 30 days away that could have a meaningful impact on the global markets. For instance, the Brexit vote and the June meeting of the US Fed both occur just outside of the next 30 days. With those outcomes still beyond the 30 days time horizon of the VIX, the fear gauge has a difficult time taking these into account. Once the Brexit and Fed meeting are inside of 30 days, it seems logical that the VIX will move noticeably higher. The current reading of 15.04 implies that a move of 4.34 percent is likely to occur over the next 30 days. As always, the direction of the move is unknown.

For the trading week ending on 5/13/2016, returns in the hybrid hypothetical models* (net of a 1% annual management fee) were as follows:

  Last Week 2016 YTD Since 6/30/2015
Aggressive Model 0.43 % 1.52 % 5.86 %
Aggressive Benchmark -0.46 % -1.25 % -6.28 %
Growth Model 0.39 % 1.57 % 4.95 %
Growth Benchmark -0.36  % -0.89 % -4.74  %
Moderate Model 0.39 % 1.66 % 4.42 %
Moderate Benchmark -0.26 % -0.57 % -3.26 %
Income Model 0.44 % 2.25 % 4.92 %
Income Benchmark -0.12 % -0.20 % -1.49 %
S&P 500 -0.51 % 0.13 % -0.80 %

*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.

 

The hybrid models started the week defensively positioned as the risks to the downside in the market were outweighing the potential gains. Early during the week, signals I closely watch flipped and signaled that it was time to move to even more defensive positioning. Last week, across all models, I added a hedging position in the Profunds Ultra Short Dow fund (UWPIX). UWPIC is a mutual fund that provides two times the opposite return of the Dow on a daily basis; meaning if the Dow falls by 1 percent, the fund should be up by 2 percent (this was what occurred on Friday last week). The idea in using this fund in the hybrid models is that there is no need to sell the individual stock positions in the models if the downside risk can essentially be mitigated through the use of the hedging mutual funds. Think of it as a teeter-totter with the risk of the stocks on one side being balanced out by the hedging mutual funds on the other side. A partial hedge was applied last week and will potentially be added to over the course of the next few weeks if the markets continue to deteriorate.

 

Economic Release Calendar: Last week was a very slow week for economic news releases in terms of number of releases, but the data overall came in above market expectations. There were two releases that significantly beat market expectations (highlighted in green below) and none that significantly missed market expectations:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Neutral 5/13/2016 PPI April 2016 0.2% 0.3%
Neutral 5/13/2016 Core PPI April 2016 0.1% 0.1%
Positive 5/13/2016 Retail Sales April 2016 1.3% 0.7%
Slightly Positive 5/13/2016 Retail Sales ex-auto April 2016 0.8% 0.5%
Positive 5/13/2016 University of Michigan Consumer Sentiment May 2016 95.8 90.0

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

 

All of the economic news releases of significance last week took place on Friday with the retail sales figure for the month of April taking most of the media attention. Retail sales, as discussed above, came in higher than anticipated, easily beating all estimates, which pushed the markets lower as it increased the odds of the Fed raising interest rates at the June meeting. We seem to be stuck in a reverse economic scenario with the markets as bad news is positive for the markets and good news is bad for the markets because it means the Fed may be able to increase interest rates earlier than the markets expect. The Producer Price Index (PPI) released earlier during the day on Friday came in near expectations and had no impact on the overall markets as it did not provide any clear change to when the Fed may increase rates. Wrapping up the week last week on Friday was the release of the University of Michigan’s Consumer Sentiment index for the month of May, which came in much better than expected. Expectations had been for no change in consumer sentiment in light of rising gasoline prices, but this turned out to not be the case as consumers became much more confident during the month.

 

This week is another slow week for economic news releases, with the focus of the week being the US consumer:

 

Date Release Release Range Market Expectation
5/16/2016 Empire Manufacturing May 2016 6.2
5/17/2016 CPI April 2016 0.30%
5/17/2016 Core CPI April 2016 0.20%
5/17/2016 Housing Starts April 2016 1135K
5/17/2016 Building Permits April 2016 1130K
5/18/2016 FOMC Minutes April Meeting N/A
5/19/2016 Philadelphia Fed May 2016 2.7
5/20/2016 Existing Home Sales April 2016 5.40M

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

 

The economic news releases start off this week on Monday with the release of the Empire Manufacturing index for the month of May, which is expected to post a nice positive number after surprising everyone in April, going from a negative reading all of the way to a positive one. We will have to wait and see if the April number was the start of a trend or just a blip in the data. On Tuesday the Consumer Price Index (CPI) for the month of April is set to be released with expectations of very low inflation being seen at the consumer level in the US economy. The first housing data for the month of April is also set to be released on Tuesday as building permits and housing starts for April are released. Expectations are for both figures to remain over the 1 million mark in a sign that the US housing market is moving forward on steady footing. On Wednesday, the meeting minutes from the April FOMC meeting will be released and while the data in the meeting has largely been disseminated to the media it can sometimes be interesting to see the discussions and which Fed members were making which arguments. On Thursday a second manufacturing related release of the week comes out, that being the Philadelphia Fed Index for the month of May, which is expected to post a 2.7 reading. Remember that zero is the inflection point between expansion and contraction in manufacturing with this release. With expectations being so close to zero, this release could go either way, but determining which way the market will move after the release is anyone’s guess. Wrapping up the week on Friday this week is the Existing Home Sales figure for the month of April, which is expected to show a reading of 5.4 million units during the month. As we get more and more into the Spring and Summer selling season we should see this figure ramp up, but April is still very early in the season and the release should have little impact on the housing market or markets in general.

 

Interesting Fact — The Evolving S&P 500

 

Back in 1958, the U.S. companies in the S&P 500 had been part of the benchmark stock market index for an average of 61 years. By 2011, that average was just 18 years, based on seven-year rolling averages. At this rate, 75% of the S&P 500 will be replaced by 2027.
Source: MarketWatch

For a PDF version of the below commentary please see my PDF webpage here http://wp.me/Ppr8Z-23

Commentary quick take:

 

  • Market statistics:
    • US markets were down a little last week; investors moved toward safety
    • Earnings season weakened as it drew closer to a close
    • VIX decreased by 6 percent last week, trading counter to historical trends

 

  • Many headwinds seem to be pushing the markets
    • Continued weakness in China
    • Uncertainty over Greece
    • Puerto Rico debt problems

 

  • Earnings season in the US continued forward with a few interesting reports
    • Tesla lost less than expected
    • Almost 90 percent of first quarter reporting is completed
    • Retailers take the spotlight this week with earnings reports

 

  • The situation we have seen many times before in Greece is about to repeat
    • IMF and others demanding structural changes be made in Greece
    • Debt as a percent of GDP in Greece is currently 180 percent
    • Bailout money deadline is less than two months away

 

  • Puerto Rico’s debt problem is only growing larger
    • Last week Puerto Rico missed $422 million payment
    • Even larger payments are due over the next few months
    • Will the US Congress have to step in and bail out the country?

 

  • US politics gets more and more interesting

 

  • Hybrid investments strategy update:
    • There were several changes last week in the models
    • Increased defensive positioning
    • Almost through earnings season for individual equity holdings
    • Stock Spotlight—AmerisouceBergen (ABC)

 

  • Economic news releases:
    • Last week the economic news releases came in slightly below expectations
    • This week the focus will be on the US consumer

 

  • This week for the markets:
    • Global markets will remain nervous
    • Earnings season will quickly start drawing to a close

 

  • Interesting Fact: Greece is at it again.

 

 

Major theme of the markets last week: Complacency and Uncertainty

 

Complacency and uncertainty were the major themes for the global financial markets last week. Economic data from around the world almost without fail pointed toward slowing economic growth. Uncertainty sounding Greece, China and the US labor market all made headlines and caused investors to second guess growth and economic stability around the world. With all of the uncertainty, the developed global markets traded timidly last week on lower than average volume, with the exception of earnings related spikes in volume seen on a few specific stocks. A small “fear trade” seemed to be partially in place last week as historically defensive sectors of the markets such as utilities, real estate and consumer staples performed the best; while more risky sectors such as oil and gas exploration, pharmaceuticals and biotechnology saw large outflows.

 

US news impacting the financial markets:

 

Employment in the US took center stage last week in terms of news that impacted the US markets because the data came out weaker than anticipated and thus undermined one of the two pillars of the Federal Reserve’s policies. The positive trends in the labor markets have been the primary focus point by the Fed in outlining its reasoning about when to start increasing interest rates. Last week we saw weakness in the data released about the current US labor market, but it could just be transitory in nature due to the time of year. The chart to the right from investing.com shows the nonfarm payrolls figures for the past three years. As you can see it can be a very volatile indicator with some seasonality in it as well. The most recent data point is on the far right side at 160,000 jobs created during the month of April. This was well below expectations, which had been for a reading over 200,000, just as it had been for the previous two months. Economists are pretty consistent with their estimations of the US economy needing to create 200,000 jobs per month in order for the economy to absorb the new entrants into the workforce. Additionally, the Bureau of Labor also revised downward the previous two months of nonfarm payroll figures in aggregate, cutting 19,000 jobs from the previously released figures. Conveniently, however, the average number of nonfarm payroll jobs created over the past 3 months after taking into account revisions is exactly 200,000 jobs per month. So why with the payrolls figures worse than expected did the headline unemployment rate not increase? Overall Unemployment failed to increase from the 5 percent level during the month of April because the labor force participation rate declined during the month. The labor force participation rate is a measure of workers who are employed or who are actively looking for work. When the figure decreases, as it did last month, it means there are less people either working or looking for jobs; this could be due to things like retirement or individuals no longer looking for work. In light of the changes in the US labor market it seems ever more unlikely that Chair Yellen will increase interest rates as soon as she may otherwise have wanted to increase them. She will have to wait and see if the labor market continues to weaken or if the new developments really are temporary and transitory in nature. At the same time, she has to weigh the lack of inflation that we are seeing at all levels of the US economy. This lack of inflation combined with weakening labor data leaves her at odds over when to increase interest rates and contributes to the markets currently pricing in fewer than two increases during 2016, under her stated intent to increase rates twice during 2016. In addition to the labor market having an impact on the US financial markets last week, earnings reports also continued to have a noticeable impact.

nonfarm payrolls

Last week, first quarter earnings season crossed over the three quarters of the way complete mark and did so with some very interesting earnings reports.  There were large misses both above and below expectations last week as the companies reporting earnings were mostly smaller than they have been over the previous three weeks. 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:

 

3D Systems -400% Hain Celestial 0% Pfizer 22%
Alibaba Group -47% Henry Schein 1% Prudential Financial -8%
Alleghany 27% Hyatt Hotels 4% SeaWorld 7%
Anadarko Petroleum 6% Jack Henry & Associates 3% South Jersey Industries -2%
Archer Daniels Midland -2% Kellogg 4% Sprouts Farmers Market 3%
Big 5 Sporting Goods -300% Manitowoc -33% SunPower -83%
Church & Dwight 2% Marathon Oil 9% Sysco 10%
Clorox 10% Maximus 5% Tesla Motors -59%
Ferrari 45% McDermott International 1200% Time 0%
Fitbit 175% Molson Coors Brewing 26% Time Warner 16%
Fluor -1% New York Times 11% Valero Energy -18%
GoPro -14% Noodles & Co 14% Whole Foods Market 7%

 

Three of the well followed technology companies that reported earnings last week all missed expectations by double digits; the companies include 3D systems (leader in 3D printing technology), Tesla (electric cars) and SunPower (leader in solar panel manufacturing). The negative reports from these three companies were one of the contributing factors to the declines seen on the NASDAQ last week. Tesla specifically had a difficult quarter, after slowly ramping up deliveries of the new Model X SUV and spending a large amount of money on its new gigafactory being built in New Mexico. In its quarterly earnings report, Tesla laid out a very strong production schedule, showing that the company would go from making 100,000 vehicles during 2016 to 500,000 vehicles in 2018. The market cheered such optimism, but analysts were quick to point out the extreme difficulty in Tesla actually hitting its target. One very bright spot last week was McDermott International, which beat expectations by 1,200 percent as the company saw a lot of activity start to pick up in the upstream oil and gas industry during the quarter. This is a positive development, both for the company as well as potentially for the oil and gas industry overall, as the company supplies many different types of heavy machinery to oil field and production areas around the world.

 

According to Factset Research, we have seen 436 (87 percent) of the S&P 500 companies release their results for the first quarter of 2016. Of the 436 that have released, 71 percent have met or beaten earnings estimates, while 29 percent have fallen short of expectations. When looking at revenue of the companies that have reported, 53 percent of the companies have beaten estimates, while 47 percent have fallen short. Both the earnings per share and revenues figures declined last week in what looks like a trend that could follow into the end of the reporting period. In aggregate, earnings for the S&P 500 have declined by 7.1 percent on a year over year basis through first quarter 2016. Materials and Consumer Staples are the two best performing sectors of the markets in terms of companies beating expectations, while Energy and Utilities are the two worst performing sectors in terms of the percentages of companies beating expectations.

 

With such a large percentage of S&P 500 member companies having already reported earnings it is becoming more and more difficult to see the overall numbers for the quarter changing much beyond the current readings. Looking forward, there have been 79 companies that have issued forward guidance with 55 of them issuing negative guidance while 24 have issued positive guidance for the next quarter and the rest of the year.

 

This week there are many companies (1517 in total) that are reporting their earnings, but the majority of the companies are very small and not very well known. The table below shows the companies that have the greatest potential to move the markets highlighted in green:

 

Allergan J C Penney Shake Shack
Arctic Cat Jack In The Box SolarCity
Brookdale Senior Living Kohls Sotheby’s
Dean Foods Liberty Media Symantec
Dillard’s Macys Tyson Foods
Electronic Arts Neenah Paper Walt Disney
Fossil Group Nordstrom Wendys
Good Times Restaurants Ralph Lauren Xcel Energy

 

Retailers will be the focal point for the earnings reports this week as we are quickly moving into the last few weeks of earnings reporting for the first quarter of 2016. Retailers are typically the last of the minor sectors of the markets to report earnings because they have to consolidate results from many different operations around the country. This week, retailers releasing results includes Dillard’s, Macys, Nordstrom, JC Penny, Ralph Lauren and Kohls. Disney will also likely be in the spotlight this week when it reports earnings after having what will probably be one of the better quarters in terms of box office sales after several successful movies were released during the quarter. As always, analysts will also be closely monitoring park sales and visitors, both for locations here in the US and abroad, as it is a good proxy for the leisure and entertainment sector as a whole, since Disney has such a wide reaching business model.

 

The final part of the US news, which had a little impact on the US financial markets was political. Last week Indiana held its primary voting contests for both the Republicans and the Democrats. Bernie Sanders upset Hillary Clinton on the Democratic side of the race, while Donald Trump easily beat both Ted Cruz and John Kasick on the Republican side. The biggest surprise came when Ted Cruz announced that he was dropping out of the race for the Republican nomination. John Kasick also dropped out of the race, leaving Donald Trump as the only Republican contender still in the race going into the convention in Cleveland. The markets seemed to react a little to the announcements as a Trump Presidency could mean some pretty big changes to global trade in terms of him seeking to add tariffs and taxes on variety of goods coming into the US from other countries. The larger reaction to a President Trump could come later if it looks like he has a chance of actually winning the general election. He has an uphill fight to even get the republican party behind him as several past presidents and other high ranking Republicans have announced that they would not be supporting Trump in the general election, but a lack of support from the establishment seems to be what Donald Trump has been riding to victory so far in this election, so the establishment not supporting him may actually turn into a positive thing for his campaign.

 

Global news impacting the markets: Global markets seemed to be hit from all sides last week as there were a variety of developments that pointed toward potential trouble on the horizon. The first set of news releases that adversely affected global markets came out of China and was the latest figures showing import and export data for the country. During the month of April, China saw its exports decline by 1.8 percent and its imports fall by 10.9 percent, marking the 18th consecutive month of slowing imports. One of the main concerns in the data last week from China was that exports to the US declined by 9.3 percent during April when compared to a year earlier. This is a big problem because while China wants to convert from an export driven economy into an internal consumption economy the country is many years away from actually successfully pulling off the change and if the US drastically slows its buying from China, China may be forced to change faster than it would otherwise like to change. These new developments raised a fresh round of questions about a potential hard landing for the Chinese economy; something economists have been warning about for more than a year. Even the government in China seems to have taken note of the negative overtones by foreign economists about its economy as last week the country issued verbal warnings to commentators whose public remarks on the economy in China are “out of step” with the government’s statements. China can very easily control the media within its borders, but it is highly unusual for the government to openly criticize foreign press and journalists about how they portray China. While investors are worried about a hard landing in China, there are renewed fears that there may be no landing at all in Greece as the debt situation seems to be once again coming to ahead and both sides are reluctant to budge.

 

Greek debt seems like a gift that just keeps on giving. It seems that for the past 6 years Greece has been on the financial ropes at least once per year; every time Greece needs more bailout money from the rest of Europe to pay its debts. It is not surprising that this situation keeps coming up as it is nearly impossible for a country to get out of debt and financial troubles by simply adding more debt to the situation and yet the lenders keep giving Greece money. Currently the situation is that an agreement reached in July of 2015 that provided Greece with billions in bailout funds called for specific actions to be taken for the country to receive further bailout funds in the future. It has now been almost a year and Greece has to prove to the IMF and other lenders that it has made progress on what it said it would do and, surprise, the country has not. Pension reforms and increasing taxes were on the top of the list of reforms called for; Greece reluctantly passed these reforms yesterday (past the deadline) to the eruption of large crowds outside of the parliament building, which started to riot after the vote. But the items that were passed last night were nowhere near enough to fix the situation in Greece. The chart to the right from a leaked IMF letter shows the debt level in Greece as a percentage of GDP (gross domestic output) with projections going into the future. You can see that Greece is currently at 180 percent, meaning the country has 80 percent more debt than it has total GDP. While the projections look good, with the figure coming down much closer to 120 percent by 2030, the projections are based on some growth assumptions that are very lofty and highly unlikely. The other longer run projections for Greece that the IMF has run out to 2060 has debt as a percentage of GDP jumping significantly higher, up to about 300 percent of GDP in 2060. Knowing these projections and the unlikely chance of growth at any meaningful rate in Greece, the Greek government is calling for changes to the bailout agreement. The changes being requested by Greece make it easier for Greece to repay debts as it is seeking to cut debts outstanding and lengthen the terms of the paybacks. Germany is taking a hard line stance to these negotiations, as it rightfully can, since a large part of the bailout funds that have been given and will be given to Greece comes from Germany. Germany said it would not accept any changes to the existing deal for bailout funds. The IMF has also signaled its unwillingness to make changes to the deal agreed to last year. So, once again we are watching a giant game of chicken, in which Greece is threatening to no take action at the expense of a possible default on debt payments, while the lenders are holding fast. The situation with Greece should come to a conclusion over the next few weeks as July 1 is the hard deadline. Between now and then, however, the global financial markets could be watching very closely and reacting to developments along the way. Add in the uncertainty over a potential Brexit with the UK (vote being held on June 23rd) and it becomes easy to see volatility in Europe increasing. Closer to home, Puerto Rico is making more and more noise about its debt burden and the spillover effects could be seen shortly.

Greece Debt percent GDP

Puerto Rico has been in financial trouble with its massive debt load for years, but only recently have things started to go downhill fast as the country has been unable to float bonds or take other standard measures to raise funds. On Monday last week, Puerto Rico missed a $422 million bond payment. While the rating agencies have yet to label the country outright in default, it certainly looks like that is the direction the country will be headed. The governor of Puerto Rico Alejandro Garcia Padilla said last week that Puerto Rico will likely miss a large loan payment of $800 million on the first of July. The government in Puerto Rico has turned to the US Congress looking for a bailout, and legislation has been partially passed, but this will turn into billions of dollars needing to be lent to the island country to fix the situation. Much like Greece, Puerto Rico has little incentive to change other than the threat of being cut off from the global financial markets. The potentially largest impact of the situation in Puerto Rico could be seen in the municipal bond market as muni bond managers have long used Puerto Rican bonds in their various nationwide and state specific bond funds because the bonds are tax exempt in every state and also enjoy federal tax exempt status. Managers would use the Puerto Rican bonds to boost their payouts as the coupon rates on the bonds were much higher than they could find in their respective states or at a national level. Higher returns, however, come with high risks and some of those risks with Puerto Rican bonds are just now starting to be realized in earnest.
Technical market review:

 

With all three of the major indexes in the US moving lower last week, it was not surprising to see that all three indexes pushed further below their most recent technical support levels. The charts below show each of the three major indexes, plus the VIX, drawn with green lines. The red lines on the three major indexes depict the closest resistance levels, as represented by points that have been tested on each index several times in the last 6 months. The blue lines represent the closest level of support for each of the indexes, established by points that in the past the markets have touched prior to bouncing higher. For the VIX, the red line remains the rolling 52-week average level of the VIX.

4 charts combined 5-9-16 

In terms of technical strength, nothing really changed last week. The NASDAQ (lower left pane above) remained the weakest, while the Dow (upper right pane above) remained the strongest. All three of the indexes are about 2 percent away from their most recent support levels and it would not be unusual to see the indexes go down and at least test those previous support levels. One thing that in general is lacking in the current market environment is a clear catalyst for moving the markets either significantly higher or lower. Earnings season is largely behind us and we are starting to move into the summer doldrums for the financial markets. Currently the risk seems to be to the downside, but there seems to be many factors that are pointing to the markets meandering sideways for the time being. The VIX (lower right pane above) also seems to be signaling that sideways movement is the most likely direction going forward as even last week, with the market declining in value, the VIX also moved lower.

 

Market Performance: Last week was a down week for the US indexes as all three moved lower in broad selling that was partially due to earnings reports and partially due to global macro concerns:

 

Index Change Volume
Dow -0.19% Below Average
S&P 500 -0.40% Average
NASDAQ -0.82% Average

 

As expected during a risk off trading week, the Dow turned in the best performance. It didn’t hurt that there were very few of the Dow component companies reporting earnings last week either, while the S&P 500 was in the middle in terms of performance and the more risky NASDAQ brought up the rear. Overall volume last week was close to average and did not contribute to any fears of an accelerating deterioration in the markets.

 

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

 

Top 5 Sectors Change Bottom 5 Sectors Change
Real Estate 4.61% Oil & Gas Exploration -6.38%
Utilities 0.92% Pharmaceuticals -5.20%
Consumer Staples 0.71% Biotechnology -4.73%
Aerospace & Defense 0.43% Technology -4.64%
Consumer Service 0.27% Natural Resources -4.59%

As mentioned above, defensive sectors of the market performed the best last week as the higher risk sectors had a very tough week. Oil and Gas exploration had a bad week despite the large wild fire in Canada, which is cutting off a significant percentage of oil production within Canada. Pharmaceuticals and Biotechnology both continued to struggle as Valeant Pharmaceuticals looks to be headed for even more trouble after a Senate hearing during which hedge fund manager Bill Ackman gave testimony that did not show the industry in general in a positive light.

Fixed income markets traded about as normally as possible last week as investors moved into US government bonds as they favored the safety of the US when compared to almost any other bonds in the world:

Fixed Income Change
Long (20+ years) 1.03%
Middle (7-10 years) 0.52%
Short (less than 1 year) 0.03%
TIPS -0.20%

Currency trading volume was light last week as there were a large number of holidays in Asia over the course of the previous week. The US dollar increased by 0.91 percent against a basket of foreign currencies as traders adjusted their positions to new labor data in the US that could impact when the Fed starts to increase interest rates. All of the major global currencies declined last week against the US dollar, with the best performance of the global currencies being the Singapore Dollar as it lost 0.23 percent against the value of the US dollar. The weakest of the major global currencies last week was the Australian Dollar for the second week in a row as it declined by 3.05 percent against the value of the US dollar. Much of the decline in the value of the Australian dollar was due to an interest rate cut by the central bank.

Commodities were almost all negative over the course of the previous week as Livestock was the only positive performer for the week:

Metals Change Commodities Change
Gold -0.38% Oil -3.01%
Silver -2.06% Livestock 3.14%
Copper -6.38% Grains -3.06%
Agriculture -0.95%

The overall Goldman Sachs Commodity Index declined by 2.96 percent last week, as Oil decreased 3.01 percent as the fires in Canada continued to rage. The major metals were negative last week with Gold declining the least, giving up only 0.38 percent. The more industrially used Silver and Copper fell 2.06 and 6.38 percent, respectively, over fears that the slowdown in China will persist and the country will need fewer raw materials for its continued growth. Soft commodities were mixed last week with Livestock gaining 3.14 percent, while Grains fell 3.06 percent and Agriculture overall moved lower by 0.95 percent.

Last week was a negative week for the global financial markets as there was only one index that managed to increase in value over the course of the week. The best performing index last week was found in Australia, and was the Sydney All Ordinaries Index, which turned in a gain of 0.8 percent, thanks in part to an unexpected rate cut by the central bank, which pushed the Australian dollar lower. The worst performing index last week was found in Hong Kong, and was the Hang Seng Index, which turned in a loss of 4.5 percent, thanks in part to some poor-timed market holidays and concerns over the future growth of China.

Trading in an unusual fashion last week, the VIX managed to decrease over the course of the week, while the markets also decreased. Typically, when the markets are pushing lower, the VIX is moving higher and vice-versa, but this was not the case last week. Divergences between the inverse correlation between the VIX and the markets are rare, with the divergence typically closing down very quickly as either the VIX spikes upward or the markets jump higher. The current reading of 14.72 implies that a move of 4.25 percent is likely to occur over the next 30 days, meaning we will more likely see a spike upward in the VIX than the market jumping higher by a large amount. As always, the direction of the move is unknown.

For the trading week ending on 5/6/2016, returns in the hybrid hypothetical models* (net of a 1% annual management fee) were as follows:

  Last Week 2016 YTD Since 6/30/2015
Aggressive Model 0.46 % 1.08 % 5.40 %
Aggressive Benchmark -1.72 % -0.79 % -5.84 %
Growth Model 0.51 % 1.18 % 4.54 %
Growth Benchmark -1.33  % -0.53 % -4.40  %
Moderate Model 0.63 % 1.26 % 4.01 %
Moderate Benchmark -0.95 % -0.31 % -3.01 %
Income Model 0.77 % 1.80 % 4.45 %
Income Benchmark -0.47 % -0.08 % -1.36 %
S&P 500 -0.40 % 0.65 % -0.29 %

*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.

 

Last week there were two major changes to the hybrid models; both were undertaken to lower the overall risk in the models. The first change was to sell the position in the Rydex Transportation fund (RYPIX) across all models. The sale was done at a gain in the position overall for most investors in the models. The position was sold because the single position was driving far more risk in the overall model than it should have been. Oil was the driving force behind the movements in the fund and oil will likely trade more and more erratically going forward in the near future as the Saudis adapt to lower oil prices. The second position that was sold last week, also for a gain, was the Rydex Technology fund (RYTIX). This fund was sold because of the overall negative signals that were seen at the start of the week last week as the market started to roll over. We watch a wide variety of signals for market health and enough of them kicked over last week to warrant taking risk off the table. Technology was the second most risky tradable position in the hybrid models. Both of the sale proceeds were moved to cash and will likely be deployed in the near future into a new investment. In addition to managing mutual funds and tradeable positions in the hybrid models we also watch each of the stocks that are individually owned very closely and update the investment thesis on each and look at how the individual positions interact with other holdings within the models. Last week AmerisourceBergen (ABC) had a difficult week and I wanted to share my thoughts.

 

AmerisourceBergen Corporation is a pharmaceutical sourcing and distribution services company that has operations all around the US. One of its main clients is Walgreens as the company supplies a large amount of the medications that are in each Walgreen pharmacy. The Pharmaceutical distribution industry only has three major companies: ABC, Cardinal Health and McKesson. ABC last week released its Q1 earnings report in which it beat expectations of $1.59 per share by posting $1.68 per share earnings during the quarter. The earnings figure was a 15 percent gain over the same quarter last year. Revenues also increased, albeit at a slower rate, gaining 9.3 percent when compared to a year earlier. The stock, however, went down by more than 7 percent after the announcement because management called out two specific headwinds for the company as it slightly lowered the company’s full year guidance. The two headwinds called out were higher than anticipated costs on infrastructure upgrades and dwindling price inflation on the generic drugs they deliver (smaller price increases to the customer, which is good for the  customer, but cuts into the bottom line for distributors). By my estimation, the increased costs on infrastructure having to do with the Walgreens acquisition are upgrades that will benefit customers over time, but the improvements are expensive on the front end. Generic drug pricing seeing fewer increases is out of the hands of the company and they, like other distributors, will have to deal with less price increases to help support its bottom line. Management has been doing a good job of taking proactive cost cutting measures where it can as the pharmaceutical and biotechnology sectors have been very hard hit over the past 18 months. Any companies integrated with either sector has gone down with the sector overall, but it has very little to do with the individual company and what the company is undertaking. The downturn for the stock looks over done at this point and it is likely a good entry point. Even taking into account the new information released last week about the company, analysts rate the company with price targets between $77 (current value) and $101, with a target of the next 12 months. Going forward, the company is on my watch list for potentially selling, as are a few other companies owned in the model, but thus far, by my estimation, the management team at ABC has been taking the correct steps, and going forward the company has a lot of upside in terms of new potential customers and arrangements. While watching individual positions is very important, looking at all of the individual stocks that are owned in the model in aggregate is also very important. There are always stocks in the models moving in opposite directions. That is the nature of diversifying across different sectors of the markets. For those of you who have been with the hybrid strategy throughout, ABC was purchased back in late 2011 and has seen the stock increase by 110 percent since purchase. There was also a sale of some shares back in 2014 when the stock had increased in value by more than 100 percent as some long term profits were booked on the position.

 

Economic Release Calendar: Last week was a relatively slow week for economic news releases with the data overall coming in slightly below market expectations. There was one release that significantly missed market expectations (highlighted in red below) and none that significantly beat market expectations:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Neutral 5/2/2016 ISM Index April 2016 50.8 51.4
Slightly Negative 5/4/2016 ADP Employment Change April 2016 156K 196K
Slightly Positive 5/4/2016 ISM Services April 2016 55.7 54.5
Negative 5/6/2016 Nonfarm Payrolls April 2016 160K 207K
Slightly Negative 5/6/2016 Nonfarm Private Payrolls April 2016 171K 191K
Neutral 5/6/2016 Unemployment Rate April 2016 5.0% 5.0%

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 April, which came in very close to market expectations and stayed above the all-important 50 level. On Wednesday the first of the employment related figures for the week was released with the ADP employment change figure, which showed far fewer jobs were created during April than was anticipated. This somewhat negative announcement, however, was offset with the slightly better than anticipated ISM Services index, which was released at the same time and beat expectations. Friday was the big day last week for economic new releases with the government releasing a slew of information about the labor markets. The payroll figures that were release were really very poor after such strong months previously. Expectations had been for more than 200,000 jobs having been created in the nonfarm payrolls data, while only 160,000 were shown to have actually been created. Nonfarm private payrolls figures were a little better, but still well below expectations. Remember that 200,000 jobs need to be created every month in order to absorb the new entrants into the work force. Overall unemployment in the US, however, did not move and stayed at 5.0 percent. As mentioned above, the unemployment rate stayed the same because of a decline in the labor force participation rate. Overall the employment data released last week will likely make it more difficult for the Fed to increase rates at the June meeting.

 

This week is a slow week for economic news releases, with the focus of the week being the US consumer:

 

Date Release Release Range Market Expectation
5/13/2016 PPI April 2016 0.3%
5/13/2016 Core PPI April 2016 0.1%
5/13/2016 Retail Sales April 2016 0.7%
5/13/2016 Retail Sales ex-auto April 2016 0.5%
5/13/2016 University of Michigan Consumer Sentiment May 2016 90.0

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

 

This week all of the economic news releases of substance are set to be released on Friday with the potentially most impactful release being retail sales for the month of April, which is expected to increase, but do so by about half a percent. If this release comes to fruition it would signal the same type of slow and anemic growth that we have been seeing the past few months, but unlike some economies around the world, we are at least still growing and moving forward. Additionally on Friday the Producer Price Index (PPI) for the month of April will be released with expectations that it will show a very small increase in prices at the producer level, despite the price of oil having increased during the month. Wrapping up the week on Friday is the University of Michigan’s Consumer Sentiment Index for the month of May (first estimate), which is expected to be virtually unchanged from the month-end reading for April. If we see this indicator start to slip, it could be a negative sign for the overall health of the US economy as much of the economy flourishing has to do with consumers spending money.

 

Interesting Fact Greece is at it again.

 

Back in the fourth century B.C., 13 Greek city-states borrowed from the Temple of Delos. Most of the borrowers, however, “never made good on the loans and the temple took an 80% loss on its principal.” As a reference point, Plato, Aristotle, and Alexander the Great were alive during the fourth century.

 

Source: Investopedia

For a PDf version of the below commentary please see my PDF upload page here http://wp.me/Ppr8Z-23

Callahan Capital Weekly Market Commentary

May 2nd, 2016

 

Commentary quick take:

 

  • Market statistics:
    • US markets were down; big tech weighed heavily on the NASDAQ
    • Earnings season moved ahead with mixed results
    • VIX increased by nearly 20 percent last week, as risk made a come back

 

  • Sell in May, go away and come back after Labor Day?
    • History is clear that from September to May is good time to be invested
    • History is a little less clear about May through September

 

  • US Federal Reserve kept rates unchanged
    • Fed’s statement was more hawkish than in the past
    • Gone is the external volatility language
    • Door seems to be open to a June rate hike

 

  • Earnings season continued forward with a few surprises
    • Apple missed on revenues and lowered outlook
    • Amazon, LinkedIn, Facebook and Twitter picked up the slack in the technology sector
    • Energy sector turned in mixed results on low oil prices
    • Tesla will be in focus this week

 

  • Inaction by the BOJ was more impactful than the US Fed
    • The Bank of Japan (BOJ) last Friday unexpectedly held steady on policy actions
    • Yen jumped by the most in several years, ending at 18 month high
    • Japanese equity markets fell steeply

 

  • Have we seen the top for oil?
    • Oil prices continued to rally last week
    • Could the top for oil prices be forming?

 

  • Hybrid investments strategy update:
    • There were no changes last week
    • Volatility returned closer to normal last week for the various models

 

  • Economic news releases:
    • Last week the economic news releases were worse than expected
    • This week the focus will be on employment here in the US

 

  • This week for the markets:
    • Global markets seem nervous
    • Earnings reports will continue to drive market performance

 

  • Interesting Fact: What soft drink maker turns 130 on Mother’s Day?


Major theme of the markets last week: Sell in May, go away and come back when?

 

We are starting to get to that time of year when investors start to recite a very old saying, “Sell in May and go away, come back after Labor Day.” This saying is not exactly accurate, as the original saying is “Sell in May and go away come back after St Leger Day.” St Leger Day is the final horse race in the UK horse racing season that takes place during the first half of September every year. The reasoning behind the saying is that large money managers and bankers liked to take time off during the summers and do things other than look at the financial markets.

 

In looking back at the historical data on the S&P 500 I found that the theory worked well in the 1960s and 1970s as the average return between the end of April and the end of September was indeed negative with the average being a decline of 2.15 percent. However, since the advent of computers and electronic markets, the benefit of being out of the markets during the same months since 1980 has been reversed with gains being seen during this time, averaging 1.07 percent between April and September. Looking at the entire time period it is a wash, with an expected gain of 0.00 percent from April through September of any given year. The period between the end of April and the end of September, however, does underperform by a lot when compared to investment returns on the S&P 500 between the end of September and the end of April. The average return between the end of September and the end of April is 8.02 percent per year since the 1960s. Much of this gain is due to the holiday shopping season, a time when the US consumer does the majority of its discretionary spending for the year and corporate America benefits from the spending. So, does it really pay to be out of the markets between May and September? The risks are clearly there in the historical data since a zero return is the expected average return between May and September, but with the way 2016 has been going so far, it seems we could be in for a summer that is far from usual, since we have a few big central bank decisions around the world and unrest will likely flare up in both the Middle East and Europe.

 

US news impacting the financial markets: Earnings supplied the biggest impact to the markets last week as earnings continued in earnest last week. After Apple took a bit of a stumble on its earnings there were many questions about how the rest of the week would turn out, but the decline in Apple failed to spill over into other companies. 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:

 

3M 7% ConocoPhillips 11% Mondelez 20%
Aetna 4% Domino’s Pizza -8% Northrop Grumman 12%
Aflac 7% Dow Chemical 7% Office Depot -23%
Amazon.com 75% Dr Pepper Snapple 9% O’Reilly Automotive 4%
Anthem 4% Dunkin’ Brands 2% Panera Bread 4%
Apple -4% eBay 5% Phillips 66 -22%
Aptargroup -1% Eli Lilly -2% Procter & Gamble 6%
Arthur J Gallagher 17% Exxon Mobil 54% Public Storage -4%
AT&T 4% Facebook 30% Raytheon 5%
Baker Hughes -33% Ford Motor 58% SunPower pushed
Boeing -4% Goodyear Tire & Rubber 3% Texas Instruments 5%
Buffalo Wild Wings -2% Groupon 25% Time Warner Cable 5%
Cabela’s 16% Helen of Troy Ltd 28% T-Mobile 211%
Capital One Financial -3% Hershey 5% Twitter 46%
Cardinal Health 8% J & J Snack Foods 5% United Parcel Service 4%
Chevron -129% JetBlue Airways 11% United States Steel -67%
Chipotle Mexican Grill 17% LinkedIn 64% VF Corp 3%
Coach 7% Lockheed Martin 3% Waste Management 5%
Colgate-Palmolive 0% Marriott International 4% Whirlpool -3%
Comcast 6% MasterCard 1% Xerox -4%

 

After Microsoft, Google and Netflix released their earnings two weeks ago, the other three major global technology companies were up to bat last week. Apple of course was the largest of the three to report earnings last week and the company indicated slowing iPhone sales and lowered revenue expectations for the next quarter and full year 2016. While revenues were lower during the first quarter than they were during the same time period a year ago, the company still booked more than $50 billion in revenue. However, after reporting earnings, Apple’s stock went down by more than 6 percent the next day of trading, taking with it the overall NASDAQ index. Amazon, Facebook and LinkedIn all turned in strong quarters in their respective earnings reports and were rewarded with their stock prices being pushed higher during the week. Last week was also the start of big oil earnings reports. Chevron, Exxon, Baker Hughes and Phillips 66 all reported earnings that missed expectations, with the exception of Exxon, which beat expectations, but still turned in a terrible quarter due to the low price of oil. One silver lining in the oil companies’ earnings is that if the corner has been turned on the price of oil, the companies are setting up to do very well. Past quarters were so poor, that comparatively (starting in the third quarter of 2016), even bad quarters with incremental improvements will seem like drastic improvements. There was nothing of note in UPS’s earnings or MasterCard’s; both indicated that it was business as usual for their business operations.

 

According to Factset Research, we have seen 311 (62 percent) of the S&P 500 companies release their results for the first quarter of 2016. Of the 311 that have released, 74 percent have met or beaten earnings estimates, while 26 percent have fallen short of expectations. When looking at revenue of the companies that have reported, 55 percent of the companies have beaten estimates, while 45 percent have fallen short. Materials and Consumer Discretionary are the two best performing sectors of the markets in terms of companies beating expectations, while Energy and Utilities are the two worst performing sectors in terms of the percentage of companies beating expectations.

 

With the large number of companies that released their earnings last week, we are now past the half-way mark in terms of the number of companies that have reported first quarter 2016 earnings. Being past the half way mark means that it becomes increasingly difficult for the percentage of companies beating or falling short of expectations to change dramatically. Thus far, the first quarter of 2016 looks good in terms of companies beating earnings per share expectations, while it has been just a mediocre quarter in terms of the number of companies that have beaten revenue expectations. While large integrated oil companies started to report earnings last week, there will be more oil earnings reported over the next few weeks; this is by far the one area of the markets that could negatively impact overall earnings going forward.

 

This week there are more companies reporting earnings (1833 in total) across many different industries when compared to the previous week, but a large number of the companies that are reporting earnings are smaller, less known companies. The table below shows the companies that have the greatest potential to move the markets highlighted in green:

 

3D Systems Hain Celestial Pfizer
Alibaba Group Henry Schein Prudential Financial
Alleghany Hyatt Hotels SeaWorld Entertainment
Anadarko Petroleum Jack Henry & Associates South Jersey Industries
Archer Daniels Midland Kellogg Sprouts Farmers Market
Big 5 Sporting Goods Manitowoc SunPower
Church & Dwight Marathon Oil Sysco
Clorox Maximus Tesla Motors
Ferrari McDermott International Time
Fitbit Molson Coors Brewing Time Warner
Fluor New York Times Valero Energy
GoPro Noodles & Co Whole Foods Market

 

Tesla will release its earnings this week and provide a glimpse into one of the more fascinating technology companies currently operating. In the earnings report, analysts and investors alike will be looking for the number of Model S cars sold and delivered during the quarter as well as the newer Model X SUV figures for the quarter. An update on the presales of the Model 3 will also likely move the stock. For all of the hype surrounding what Tesla could be in the future to the car industry, current expectations for the company in terms of financial performance are weak with expectations of the company having lost $0.58 per share during the first quarter of 2016. One area of concern that investors will be looking for in the quarterly results and conference call is anything about increased competition from other car manufacturers, which seems to be heating up. Pfizer will be closely watched this week as the pharmaceutical and biotechnology industry in general had a rough first quarter of the year. In general this week the market will focus on the companies that really either miss or beat market expectations; unlike last week, during which the markets were focused on a few very large companies releasing their earnings.

 

The US Federal Reserve’s April meeting was the other major US news item that impacted both the US markets as well as the global markets. At the conclusion of the April meeting last Wednesday the Fed decided to keep interest rates unchanged at between 0.25 and 0.5 percent. This was well telegraphed going into the meeting so it was not a surprise when no action was taken. The surprise seemed to come from the statement itself and some of the changes that were made. Cited first in the statement was the fact that labor markets continued to improve through March, even as the economy slowed down. Inflation remains stubbornly below the target of 2 percent, but this section of the statement was unchanged over the previous meeting. A big change in the statement, however, was the omission of “global economic and financial developments continue to pose risks,” meaning the Fed will now focus more closely on what is happening in the the US economy rather than weigh heavily other factors such as potential problems in other areas of the world. Overall, the changes made in the statement were seen as hawkish when compared to the previous, more dovish statement. Hawkish means that the Fed is more likely to increase rates sooner rather than later. Despite the markets viewing the statement as hawkish, the odds of a rate hike at the next meeting actually deteriorated, as indicated by the table below. The odds of a rate hike in June, according the CBOE’s Fed Watch data, suggests only a 17 percent chance of a rate hike in June, while it had been 23 percent going into last week’s Fed meeting. The only month that the chance of a rate hike did not decrease was September, as it stayed at 49 percent. Based on the percentages for the potential changes, the market still seems to see it as very difficult for the Fed to increase interest rates twice during 2016, despite the Fed clearly saying it would like to undertake two rate hikes this year. Fed watch 5-2-16

Global news impacting the markets: Japan surprised the global markets last week and the surprise was not all positive. The day after the US Federal Reserve meeting many eyes focused on the Bank of Japan (BOJ) and its potential policy changes. Speculation was that the BOJ would lower interest rates even further into negative territory, increase stimulus or pursue some combination of both. However, the BOJ decided to stay put, making no changes to its policies, much too many economists’ and investors’ surprise. The BOJ’s target interest rate will stay at -0.1 percent and its stimulus program will remain at 80 trillion Yen per month of securities being purchased by the government. The immediate reaction was for the Japanese Yen to jump higher, in its single largest move over the course of 5 minutes ever and also for the equity index, the Nikkei 225, to drop by its largest percentage change I could find over the past 5 years. So why the inaction by the BOJ in light of deflation and a weakening labor force? No one knows why the BOJ did not take action as it provided little in the way of evidence or justification for its stance. At the press conference that followed the BOJ meeting, BOJ Governor Kuroda just said that if further stimulus was needed the BOJ would be ready to do more, but provided little other insight. With Japan being the second largest economy in the world behind the US, any faltering or recession within the country could have ramifications around with world.

 

The other major story in the global news last week was about oil and how the price of oil has come up a long way from the February lows, but that doesn’t mean the price can’t move back down. The chart below from Bloomberg shows an interesting pattern that could be forming in regards to the price of oil. The chart below shows oil prices and the rallies seen between late January and May, both this year and last year, drawn with the red lines. It also shows the ensuing decline seen last year from May through August. In the chart, oil prices moved up and then right back down. The chart pattern looks similar between this year and last; could it repeat? If it does repeat we could be in for oil prices moving all of the way back down to about $30 per barrel. One factor that could come into play with oil prices declining is Saudi Arabia’s oil and what the country will withstand to either gain market share from competitors or assert its control over a tense religious situation in the oil producing Middle East. Oil was a very large driver of market performance over the past 18 months and it will likely remain a key factor in the future movements of the global financial markets. will oil repeat 5-2-16
 

Technical market review: With all three of the major indexes in the US moving lower last week it was not surprising to see that all three indexes are now below their technical levels of support. The charts below show each of the three major indexes, plus the VIX, drawn with green lines. The red lines on the three major indexes depict the closest resistance levels the indexes may hit in the coming trading weeks, as represented by points that have been tested on each index several times in the last 6 months. For the VIX, the red line remains the rolling 52-week average level of the VIX.

4 charts combined 5-2-16

Going into the week the Dow (upper right pane above) was the strongest of the three major indexes and it ended the week as the strongest of the three major indexes, despite the index being weakened after moving below its most recent level of support. The S&P 500 (upper left pane above) comes in second place after having failed to move above its resistance level and now seems to be content pushing lower. The NASDAQ (lower left pane above) remains the weakest of the three major indexes, thanks in large part to a few specific stocks that are weighted heavily in the index that were really pushed down by earnings reports this week. The VIX (lower right pane above) moved from near its lowest point of the year up by almost 20 percent, but still failed to move above 16.

 

Going forward it looks as if the markets will likely take a meandering path sideways with the upper bound of the trading range being the support levels drawn in red above and the lower end of the range being about 3 percent lower than current levels. It would take a major shift in sentiment to push the markets much higher or lower than the above described trading range. One catalyst that could easily push the market higher or lower is the situation in Europe, pertaining to the potential Brexit as well as negations between Greece and creditors required to unlock bailout funds by the end of June.

 

Market Performance: Last week was a down week for the US indexes as all three moved lower in broad selling that was partially due to earnings reports:

 

Index Change Volume
S&P 500 -1.26% Average
Dow -1.28% Below Average
NASDAQ -2.67% Average

 

Volume was average last week on both the NASDAQ and the S&P 500, while below average on the Dow. If spikes in the volume of companies that reported earnings last week are accounted for, volume would have been significantly below average. This lack of volume means that many investors are waiting in their current holdings as they try to make sense of the future direction of the markets. With volume being so low, the major indexes are prone to large swings if volume picks up as many investors try to adjust their investments at the same time.

 

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

 

Top 5 Sectors Change Bottom 5 Sectors Change
Commodities 3.68% Biotechnology -7.07%
Utilities 2.24% Pharmaceuticals -5.15%
Natural Resources 1.75% Semiconductors -3.97%
Infrastructure 1.63% Home Construction -3.76%
Aerospace & Defense 0.94% Broker Dealers -3.29%

Commodities in general are not really a sector of the equity markets, but the performance was so strong and has been for the past few weeks that I included it in the lists of sector performance this week. Commodities increased due to large gains in gold and silver after the Fed and BOJ decisions. Defensively positioned Utilities and Aerospace and Defense performed well last week, thanks to strong earnings results. On the flip side last week, three very technology heavy sectors were the hardest hit as Biotechnology, Pharma and Semiconductors all declined by nearly 4 percent or more. Typically, results like these from these sectors would indicate that last week was a risk-off trading week, but with earnings driving much of the movement last week it is hard to pin the reason for the declines in the three main tech sectors on a risk-off trade.

Fixed income markets had a bit of a wild week as traders adjusted their future expectations to the announcements from the US Fed as well as the BOJ. At the end of the week demand for US government fixed income investments increased and, with it, prices:

Fixed Income Change
Long (20+ years) 0.79%
Middle (7-10 years) 0.54%
Short (less than 1 year) 0.00%
TIPS 0.93%

Currency trading volume was light last week and Bloomberg ran a very interesting article about just how light volume has been recently. The chart to the right shows currency volume 5-2-16overall currency volume and how it has been steadily declining for the past 4 months as traders around the world wait on the side lines to see how all of the government stimulus programs and actions around the world will affect the currency markets. The US dollar decreased by 2.23 percent against a basket of foreign currencies as traders adjusted their positions on Friday after digesting the BOJ announcement that sent the Yen rocketing higher. The best performance of the global currencies last week was the Japanese Yen as it gained 4.84 percent against the value of the US dollar. The increase in the value of the Yen was the largest weekly move for the Yen that I can find looking back in the data and it was driven entirely by the BOJ decision mentioned above. The weakest of the major global currencies last week was the Australian Dollar as it declined by 1.37 percent against the value of the US dollar, which seems a little odd given the movement in commodities and the heavy reliance on the commodity trade for the Australian economy.

Commodities were all positive over the course of the previous week (a somewhat rare occurrence):

Metals Change Commodities Change
Gold 4.89% Oil 5.02%
Silver 5.27% Livestock 1.98%
Copper 0.42% Grains 4.39%
Agriculture 2.58%

The overall Goldman Sachs Commodity Index advanced by 3.68 percent last week, as Oil increased 5.02 percent on relatively little new developments. The major metals were positive last week with Gold gaining 4.89 percent, turning around a decline that had been in place over the previous three weeks. The more industrially used Silver and Copper gained 5.27 and 0.42 percent, respectively. Both Silver and Copper have now made it three positive weeks of movement in a row. Soft commodities were also positive last week with Livestock gaining 1.98 percent, while Grains advanced 4.39 percent and Agriculture overall moved higher by 2.58 percent.

Last week was a negative week for the global financial markets as there were only two indexes that managed to increase in value over the course of the week. The best performing index outside of the US last week was found in Canada, and was the Toronto Stock Exchange, which turned in a gain of 0.6 percent, as the economy welcomed the increasing value of commodities seen around the world. The worst performing index last week was found in Japan, with the Nikkei 225 index, which turned in a loss of 5.2 percent for the week as inaction by the BOJ, combined with a strengthening Yen, provided a double hit to the index.

The VIX jumped higher last week during what turned out to be a very exciting week for the fear gauge as it gained 18.76 percent. With the increase last week the VIX is now at roughly the same point it has topped out at three times previously, meaning we could be in for a reversal in the near term on the VIX if history repeats itself for the index movement. The current reading of 15.70 implies that a move of 4.54 percent is likely to occur over the next 30 days. As always, the direction of the move is unknown.

For the trading week ending on 4/29/2016, returns in the hybrid hypothetical models* (net of a 1% annual management fee) were as follows:

  Last Week 2016 YTD Since 6/30/2015
Aggressive Model -0.37 % 0.64 % 4.93 %
Aggressive Benchmark -0.79 % 0.94 % -4.20 %
Growth Model -0.23 % 0.66 % 4.00 %
Growth Benchmark -0.61  % 0.81 % -3.11  %
Moderate Model -0.03 % 0.62 % 3.35 %
Moderate Benchmark -0.43 % 0.64 % -2.09 %
Income Model 0.09 % 1.02 % 3.65 %
Income Benchmark -0.21 % 0.40 % -0.89 %
S&P 500 -1.26 % 1.05 % 0.11 %

*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 Callahan Capital hybrid model over the course of the previous week. Earnings season continued to take its toll on a few of the specific stocks held in each model, but on the whole the earnings reported so far have been as expected. Outlooks for many multinational corporations have cited oil and the US dollar as two areas that could negatively impact earnings going forward, also as expected. Once we are finished with earnings season I would expect that the volatility we have seen in the models over the past three weeks to largely dissipate. Signals for overall risk in the models have yet to flip toward more defensive positioning being needed, but remain close to the inflection points.

 

Economic Release Calendar: Last week was a busy week for economic news releases with the data overall coming in below market expectations. There was one release that significantly missed market expectations (highlighted in red below) and none that significantly beat market expectations:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Neutral 4/25/2016 New Home Sales March 2016 511K 521K
Slightly Negative 4/26/2016 Durable Orders March 2016 0.80% 1.70%
Negative 4/26/2016 Durable Goods -ex transportation March 2016 -0.20% 0.50%
Neutral 4/26/2016 Case-Shiller 20-city Index February 2016 5.40% 5.60%
Slightly Negative 4/26/2016 Consumer Confidence April 2016 94.2 96.7
Neutral 4/27/2016 Pending Home Sales March 2016 1.40% 0.30%
Neutral 4/27/2016 FOMC Rate Decision Current Meeting 0.50% 0.50%
Slightly Negative 4/28/2016 GDP-Adv. Q1 2016 0.50% 0.90%
Neutral 4/28/2016 Initial Claims Previous Week 257K 259K
Neutral 4/28/2016 Continuing Claims Previous Week 2130K 2135K
Slightly Positive 4/29/2016 Personal Income March 2016 0.40% 0.30%
Slightly Negative 4/29/2016 Personal Spending March 2016 0.10% 0.20%
Neutral 4/29/2016 Core PCE Prices March 2016 0.10% 0.10%
Slightly Negative 4/29/2016 Chicago PMI April 2016 50.4 53.3
Slightly Negative 4/29/2016 University of Michigan Consumer Sentiment April 2016 89 90

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

 

Last week the economic news releases started on Monday with the release of the new home sales figure for the month of March, which came in very close to market expectations and had little impact on the overall markets. On Tuesday the negative news for the week started as durable goods orders for the month of March were shown to be below expectations. Overall durable goods orders increased only 0.8 percent, while it had been expected to post a gain of 1.7 percent. Orders excluding transportation fell by 0.2 percent after expectations had been for a gain of 0.5 percent. Expectations were obviously a little too high after the negative -1.3 posted in February. The financial markets seemed to take this miss in stride, however, and moved higher on the news. Consumer confidence was released later during the day on Tuesday and it too fell short of expectations, but not by a wide enough margin to cause alarm. On Wednesday all eyes were on the Fed, as discussed above. The Fed decided to leave interest rates alone while making a few hawkish changes to its statement. On Thursday the GDP print for the first estimate of GDP here in the US came in lower than expected, but still well above zero so the market seemed to shrug this release off without too much interest. The second and third revision to this figure will play a much more important role in understanding where the US economy really is in terms of a recovery. On Friday personal income and spending stole the headlines as income came in higher than expected, while spending came in lower. The Chicago PMI figure should have received more press. The Chicago PMI figure came in at 50.4 last week, while expectations had been for a 53.3 reading. This may not seem like much of a difference, but given the negative manufacturing data coming out of various regions of the US during the month, seeing this number stay above 50 was a sigh of relief for many economists. Wrapping up the week last week was the University of Michigan’s Consumer Sentiment Index for the month of April, which dipped a little, but not by enough to entice a market reaction.

 

This week is a slow week for economic news releases, with the focus of the week being on the current employment situation here in the US:

 

Date Release Release Range Market Expectation
5/2/2016 ISM Index April 2016 51.40
5/4/2016 ADP Employment Change April 2016 196K
5/4/2016 ISM Services April 2016 54.5
5/5/2016 Initial Claims Previous Week 259K
5/5/2016 Continuing Claims Previous Week 2135K
5/6/2016 Nonfarm Payrolls April 2016 207K
5/6/2016 Nonfarm Private Payrolls April 2016 191K
5/6/2016 Unemployment Rate April 2016 5.00%

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

 

This week the economic news releases start on Monday with the release of the ISM index for the month of April, which is expected to be roughly the same as it was during March. The key with this release is that the figure stays above 50 as that is the inflection point between manufacturing in the US moving from expansion to contraction. The data from the different regions for the month of April was mixed so this might come in very close to 50. On Wednesday the start of the employment related data is set to be released with the ADP employment change figure for the month of April, which is expected to show an increase of 196,000 jobs during the month. This release could play into economists’ expectations for the employment numbers at the end of the week, but it would have to come out very different than expected to see estimates for the releases later during the week change. Later during the day on Wednesday the Services side of the ISM is set to be released with expectations that we will see a somewhat strong reading from the services than from the overall ISM released earlier during the week. On Thursday the standard weekly unemployment related figures are set to be released, but these releases will largely be overlooked by the markets unless something drastic changes in the levels when compared to last week. Friday is the big day of the week, as the US government releases its latest estimates for payrolls as well as the overall unemployment rate here in the US during the month of April. Expectations are for no change from the 5 percent unemployment rate seen during March, and for average payroll figures, showing about 200,000 jobs gained during the month. 200,000 jobs on both the public and private payrolls are just enough jobs to cover the new entrants in the labor pool, so it would be unlikely that we see the headline rate decrease if the payroll figures are correct. One factor that could move the unemployment rate higher is people who were out of the labor force deciding to move back in during the month by starting to look for a job. This figure can be highly variable and also have a noticeable impact on the overall headline unemployment rate here in the US. In addition to the scheduled economic news releases mentioned above, we have several key speeches being given by Federal Reserve officials this week that the markets will surely keep a close eye on for any further information about the Fed’s current thinking as to when interest rates may start moving upward again.

 

Interesting Fact Celebrate this Mother’s Day with a Coke

 

On Sunday, May 8th, Coca-Cola will turn 130 years old. Coca-Cola has come a very long way from when Dr. John Stith Pemberton carried a jug of syrup he mixed up into Jacobs’ Pharmacy in Atlanta and mixed it with carbonated water on May 8th, 1886. The cost for a glass of what would become known as Coke was 5 cents!

 

Source: Coca-Cola http://www.coca-colacompany.com/stories/the-chronicle-of-coca-cola-birth-of-a-refreshing-idea/

 

Have a great week!

 

Peter Johnson

 

A referral from a client is a tremendous compliment and a huge responsibility that can never be taken lightly.

For a PDF version of the below commentary please see this link http://wp.me/Ppr8Z-23

Commentary quick take:

 

  • Market statistics:
    • US markets were mixed; big tech weighed heavily on the NASDAQ
    • Earnings season drove market returns
    • Oil had little impact on the markets
    • VIX decreased by more than 3 percent last week

 

  • Earnings season continued forward with some very awkward reactions
    • Big moves on many stocks both up and down as earnings were released
    • AMD jumped more than 50 percent
    • Google and Microsoft drug down NASDAQ after posting results
    • Energy earnings start in earnest this week

 

  • A potential “Brexit” continues to make headlines around the world
    • Potential US trade impact $114 billion annually
    • President Obama personally met with Prime Minster David Cameron to discuss

 

  • Japan experienced a series of earthquakes last week
    • The hardest hit area is a manufacturing hub for the country

 

  • US Federal Reserve still being closely followed
    • Low expectations for a rate hike at this week’s meeting
    • Fed still looking for two rate hikes during 2016
    • ECB on hold with new actions, awaiting Fed’s next move

 

  • Hybrid investments strategy update:
    • There were no changes last week
    • Volatility increased in the models on core position earnings announcements

 

  • Economic news releases:
    • Last week the economic news releases were worse than expected
    • This week the focus will be GDP and US consumers

 

  • This week for the markets:
    • All about earnings
    • The Fed meeting

 

  • Interesting Fact: Triple win for Prince in 1984


Major theme of the markets last week: Earnings uncertainty

 

The earnings reporting season is always an interesting time to watch the stock market as you can see wide swings on what looks to be very little changes in corporate earnings; this was certainly the case last week. A few companies that had great quarters in terms of revenues and earnings results saw their stocks decline due to the outlook or currency hits abroad. A few of the technology giants saw many aspects of their evolving businesses doing very well and yet investors looked for negative information and exploited it, pushing the stocks much lower than anticipated. Yet other companies booked unremarkable quarterly results and saw their stock price increase more than 50 percent. Last week was a bit of a guessing game for investors and it will likely remain an earnings-driven guessing game in the near term until we have more companies having reported earnings. Once we get a feel for how energy earnings will turn out for the quarter, the markets will likely start to trade more “normally.” Until then, there will likely be a lot of chopping on the broad indexes as investors adjust their positions to newly released information.

 

US news impacting the financial markets: Earnings supplied the biggest impact to the markets last week as earning’s season got more fully under way. Last week was a very interesting week for earnings releases as a few of the technology giants stumbled a little. 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 Laboratories 5% Honeywell International 2% PulteGroup 26%
Advanced Micro Devices 7% Intel 10% RLI 4%
Alphabet -5% IBM 12% Royal Caribbean Cruises pushed
American Airlines 6% J B Hunt Transport 4% Sherwin-Williams 11%
Bank of New York Mellon 9% Johnson & Johnson 2% Southwest Airlines 5%
Biogen 7% Kimberly-Clark 1% Stanley Black & Decker 11%
Blackstone -30% Kinder Morgan -37% Starbucks 0%
Caterpillar 0% Las Vegas Sands -26% Stryker 3%
Coca-Cola 2% Manpower Group 5% Swift Transportation 14%
D.R. Horton 11% Mattel -63% U.S. Bancorp 1%
DISH Network 29% McDonald’s 6% United Continental 5%
General Electric 0% Microsoft -2% United Rentals 18%
General Motors 25% Morgan Stanley 20% UnitedHealth 5%
Genuine Parts 2% Netflix 100% Verizon 0%
Goldman Sachs 4% Nucor -19% Visa 3%
Hanesbrands 18% Pepsi 10% Yahoo! 150%
Harley-Davidson 6% Philip Morris -12% Yum! Brands 14%

 

It was difficult last week to not notice the impact earnings season can have on individual companies. AMD, for example, turned in a good quarter, though it was far from a great quarter. The company announced a partnership agreement at the same time and was rewarded with its stock moving up by more than 50 percent in just a single trading day. Microsoft, on the other hand, saw revenues increase during the first quarter of 2016 up to $22.08 billion, and yet it missed earnings expectations by $0.02 per share and the company stock was rewarded with a decline of more than 7 percent during the following trading day (the largest single day decline for Microsoft in more than 18 months). The movement on Kimberly-Clark was very unusual as the company reported earnings that beat expectations, while revenues were short by about $40 million on $5 billion in total and yet the stock was pummeled on Friday by almost 3.7 percent. Google also made headlines last week as it saw a decline in ad revenue, but a large increase in cloud technology income. The stock was knocked down by more than 5 percent over fears that the old models Google used to follow are not working as well as they had in the past. Old school technology companies seem to be adapting to the new technology environment very well as Intel and IBM both posted good quarters as new technologies within their respective businesses grew faster than anticipated. Earnings season can be full of very interesting stock movements and last week was no exception.

 

According to Factset Research, we have seen 131 (26 percent) of the S&P 500 companies release their results for the first quarter of 2016. Of the 131 that have released, 76 percent have met or beaten earnings estimates, while 24 percent have fallen short of expectations. When looking at revenue of the companies that have reported, 55 percent of the companies have beaten estimates, while 45 percent have fallen short. With the large number of the S&P 500 component companies having reported earnings last week we saw a significant change in the above numbers. The percentage of companies that have beaten earnings expectations increased by 5 percent, while the percentage of companies beating revenues expectations fell by 5 percent when compared to the figures from last week. Typically, it is much more difficult for companies to alter their revenue figures than it is to alter (within the GAAP accounting rules) their earnings on a quarterly basis; so the changes seen over the last week are not as positive as they may seem at first glance.

 

This week there are more companies reporting earnings (1741 in total) across many different industries when compared to the previous week. The table below shows the companies that have the greatest potential to move the markets highlighted in green:

 

3M ConocoPhillips Mondelez
Aetna Domino’s Pizza Northrop Grumman
Aflac Dow Chemical Office Depot
Amazon.com Dr Pepper Snapple O’Reilly Automotive
Anthem Dunkin’ Brands Panera Bread
Apple eBay Phillips 66
Aptargroup Eli Lilly Procter & Gamble
Arthur J Gallagher Exxon Mobil Public Storage
AT&T Facebook Raytheon
Baker Hughes Ford Motor SunPower
Boeing Goodyear Tire & Rubber Texas Instruments
Buffalo Wild Wings Groupon Time Warner Cable
Cabela’s Helen of Troy Ltd T-Mobile
Capital One Financial Hershey Twitter
Cardinal Health J & J Snack Foods United Parcel Service
Chevron JetBlue Airways United States Steel
Chipotle Mexican Grill LinkedIn VF Corp
Coach Lockheed Martin Waste Management
Colgate-Palmolive Marriott International Whirlpool
Comcast MasterCard Xerox

 

Energy will be in the spotlight this week when corporate America continues to report earnings as several of the very large integrated oil and gas companies report their results. Exxon, Chevron, ConocoPhillips and Phillips 66 will set the tone for the rest of the energy sector this week and it will likely not be a very positive tone. Despite oil prices rebounding for the second half of the quarter prices were still depressed when compared to previous years’ levels and there were a number of companies that either stopped drilling or slowed down their drilling during the quarter. Energy will be the lynch pin on the earnings season this year. If the sector pulls out a good first quarter earnings season will likely be positive. If not, we are likely to see a negative sentiment about earnings season overall. In addition to Energy potentially moving the markets this week, big technology releases continue as Apple is set to report its first quarter earnings, which is almost always a market mover as the index is such a large percentage weighting in many technology related indexes. Facebook and LinkedIn will also be closely watched by Wall Street this week as they too are technology giants that form the direction of technology in general. MasterCard and UPS both release their earnings this week as well and will be closely watched by investors because of the large amount of information that each company has about consumer spending in the US. MasterCard processes millions of transactions every year and has a very good feel for spending, while UPS ships millions of packages to end consumers and businesses and has a very good feel on spending in the US economy as well.

 

An ever present impact on the US financial markets is the US Federal Reserve and its potential to move interest rates; this was seen last week headed into its April meeting this Wednesday. When looking at the latest Fed watch figures from the CME group (table to the right) there is currently no chance of a Fed rate hike at this week’s meeting. The chance of a rate hike does not even cross 50 percent until the November meeting, if you believe what the CME and Fed Funds futures prices tell investors. It seems unlikely to me that we will see a rate hike in both November and December and with Chair Yellen having stated that she wants to see two rate hikes during 2016, it seems like June or July would be a good starting point for a hike with a second hike at the end of the year. The ECB (European Central Bank) has said that it will wait on implementing new policies until after the Fed in the US increases rates. It seems unlikely the ECB will be able to sit on its hands until very late this year and not have to take some kind of further action to try to spur growth as so many of the interest rates that sovereign governments within the EU are able to sell bonds at are negative.

Fed watch 4-25-16

Global news impacting the markets:

 

With even President Obama weighing in personally on the situation in the UK as it faces the looming vote about whether it should stay or leave the EU, the topic of the “Brexit” made many headlines last week. On June 23rd there will be a referendum vote in the UK and it asks a relatively simple question:

 

“Should the United Kingdom remain a member of the European Union or leave the European Union?”

 

With the choices for the answer being:

 

Remain a member of the European Union

or

Leave the European Union

 

Such a simple question and yet the ramifications of the results could be widely felt both in Europe and around the world. President Obama last week made a stop in London with his wife and personally met with Prime Minister David Cameron as well as other royals as he tried to reiterate how important it is for the UK to remain a part of the EU. One of his main points was that if the UK chooses to leave, trade deals would have to be drawn up anew with the US and the UK and the process could take a very long time as the UK would be at the back of the line of countries wanting to hammer out trade deals with the US. This could hurt both countries if trade between the US and the UK was slowed as the value of the total trade between the two countries, according to the US Census Bureau, is about $114 billion every year (as of 2015). According to Ladbrokes Politics (a betting house in the UK) the odds of a Brexit occurring actually went down to a new low of 26 percent following President Obama’s visit to the UK. This was down from 34 percent just a few days earlier. So perhaps President Obama weighing in did actually help the group that wants the UK to remain in the European Union. The other major story last week dealt with Japan and was the large number of earthquakes and tremors that hit the country early last week.

 

Japan experienced several earthquakes last week in the southern region of the country almost exactly 5 years after the devastating earthquakes that rocked the northern region of Japan and caused the nuclear melt down at the Fukushima power plant. This time there was no melt down of a nuclear power plant and no tsunami rushing ashore, but the earthquakes did hit a region that has a lot of manufacturing. The southern region of Japan where the earthquakes hit has a lot of manufacturing both in the automotive sectors as well as heavy machinery and semiconductors for many multinational companies. While the amount of damage caused by the earthquakes is still unknown, many of the production plants in the area remained closed for the full week last week as assessors feared further quakes damaging the region and decided to slow their physical assessments of many of the buildings. If the damage is extensive, it could take a few months to get everything back online at many of these facilities, which could cause a bottle neck for integral parts needed around the world. This in turn could have noticeable impacts on many of the world’s largest companies. The immediate effects of the earthquakes to the financial markets in Japan seemed to be positive as the Japanese Nikkei was the best performing index for the week, gaining more than 4 percent for the week; some of this movement, however, could have been due to movement in the Yen.

 

Technical market review: Not much changed in terms of the technical strength of any of the three major US indexes last week, as one index remains above its most recent resistance level, while the other two remain below. The charts below show each of the three major indexes, plus the VIX, drawn with green lines. The red lines on the three major indexes depict the closest resistance levels the indexes may hit in the coming trading weeks, as represented by points that have been tested on each index several times in the last 6 months. For the VIX, the red line remains the rolling 52-week average level of the VIX.

4 charts combined 4-25-16

The Dow (upper right pane above) is the strongest of three major indexes even as the index moved down toward the previous resistance level and then bounced upward to end the week. In second place, in terms of strength, is the S&P 500 (upper left pane above) as it failed to break above its most recent resistance level after making a run at it during the first part of last week. The NASDAQ (lower left pane above) is in third place in terms of technical strength as it moved lower over the course of the previous week and still has a very long way to go to get close to the major resistance level last seen back in November of 2015. The VIX (lower right pane above) is currently right back down at the low point that we have seen so far this year after pushing slightly lower over the course of the previous week. The VIX still seems very low given the large number of uncertainties facing investors today, but the financial markets have an uncanny ability to climb the wall of worry and that seems to be shown in the VIX at the current time.

 


Market Performance: Last week saw a mixed result for the US indexes as two moved higher and one failed to keep up:

 

Index Change Volume
Dow 0.57% Below Average
S&P 500 0.52% Average
NASDAQ -0.65% Below Average

 

Volume overall was below average, and would have been even lower had it not been for earnings season boosting certain stocks on the day the earnings were released.

 

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

 

Top 5 Sectors Change Bottom 5 Sectors Change
Oil & Gas Exploration 7.50% Utilities -3.05%
Energy 5.77% Residential Real Estate -2.23%
Natural Resources 5.72% Global Utilities -1.95%
Regional Banks 4.57% Technology -1.93%
Broker Dealers 4.31% Consumer Staples -1.21%

With oil moving up by nearly 5 percent due to the oil worker strike in Kuwait it was not surprising to see that oil and gas exploration as well as energy took the top two performing spots. Defensive sectors of the markets continued to be under pressure last week with Utilities, Real Estate and Consumer Staples all posting losses in what looks like a continuation of the risk off trade that was seen last week.

Fixed income markets were all negative last week as investors seemed to be unsure of which investments to hold onto leading up to the Fed meeting this week:

Fixed Income Change
Long (20+ years) -2.67%
Middle (7-10 years) -1.04%
Short (less than 1 year) 0.03%
TIPS -0.45%

Currency trading volume was average last week, with little movement overall relative to what we have been seeing over the past month. The US dollar increased by 0.45 percent against a basket of foreign currencies, as speculators continue to think the Fed will have a difficult time increasing interest rates more than twice during 2016, as indicated by the above Fed watch table. The best performance of the global currencies last week was the British Pound as it gained 1.50 percent against the value of the US dollar. The increase in the value of the pound was due to the decreased chance of a Brexit as a result of the upcoming election. The weakest of the major global currencies last week was the Japanese yen as it declined by 2.58 percent against the value of the US dollar, which ultimately helped exporters and pushed the Japanese stock market higher for the week.

Commodities were mixed over the course of the previous week, as Oil moved higher, while Gold and Livestock moved lower:

Metals Change Commodities Change
Gold -0.03% Oil 4.98%
Silver 4.33% Livestock -3.06%
Copper 5.64% Grains 0.54%
Agriculture 0.05%

The overall Goldman Sachs Commodity Index advanced by 3.31 percent last week, as Oil increased 4.98 percent, thanks mostly to the three day strike in Kuwait, despite the talks of a production freeze falling apart early last week in Doha. The major metals were mixed last week with Gold selling off -0.03 percent, making it two weeks in a row of declines for Gold. The more industrially used Silver and Copper gained 4.33 and 5.64 percent respectively. Both Silver and Copper have now made it two positive weeks of movement in a row. Soft commodities were mixed last week with Livestock falling 3.06 percent, while Grains advanced 0.54 percent and Agriculture overall moved higher by 0.05 percent.

Last week was a very mixed week in terms of global indexes with about half moving higher, while half moved lower. The best performing index outside of the US last week was found in Japan, with the Nikkei 225, which turned in a gain of 4.3 percent, as the weakened Yen boosted exporters within the country. The worst performing index last week was found in China and was the Shanghai SE Composite index, which turned in a loss of 3.9 percent for the week as weak economic numbers continue to come out of China, questioning the recovery that we have seen over the last few months.

The VIX moved lower last week during what turned out to be a muted week for the VIX, giving up only 2.94 percent. The VIX is now at roughly the same low point it has reached three times in the past two months, which is the lowest point in the past year. The current reading of 13.22 implies that a move of 3.81 percent is likely to occur over the next 30 days. As always, the direction of the move is unknown.

For the trading week ending on 4/22/2016, returns in the hybrid hypothetical models* (net of a 1% annual management fee) were as follows:

  Last Week 2016 YTD Since 6/30/2015
Aggressive Model -0.73 % 1.01 % 5.33 %
Aggressive Benchmark 0.74 % 1.74 % -3.43 %
Growth Model -0.72 % 0.89 % 4.23 %
Growth Benchmark 0.58  % 1.43 % -2.51  %
Moderate Model -0.75 % 0.65 % 3.38 %
Moderate Benchmark 0.41 % 1.08 % -1.66 %
Income Model -0.91 % 0.93 % 3.55 %
Income Benchmark 0.21 % 0.61 % -0.69 %
S&P 500 0.52 % 2.33 % 1.38 %

*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. Much of the performance divergence between the benchmarks, the main US indexes and the models last week was due to earning announcements or other one-off events pushing individual securities in the models lower. In general, the consumer staples and consumer discretionary sectors of the markets continued to struggle last week, but rebounded slightly on Friday. The movement of the models in the opposite direction of the broad indexes is not unusual, but it can be a little concerning for the near term future movements of the markets. As the more defensive sectors of the markets greatly lag the broad indexes, it is a sign that the more risky areas of the markets are performing very well. In this cycle, those risky areas have been energy and financials.

 

It would not be surprising, given the elevated levels of the indexes, to see them roll over in the near term following the downward lead of the defensive sectors of the markets. None of the signals have tripped to indicate that it is time to start being even more defensively positioned, but several signals are getting very close to flashing. If a signal trips to get more defensive in the models, adjustments will be made to lower the overall risk in the models, starting with selling the most risky of the mutual fund holdings. That action would be followed by adding hedging positions to protect against the downside risks in the stock holdings if the risks to further downward movement remain elevated.

 

Economic Release Calendar: Last week was a slow mid-month week for economic news releases with the data overall coming in below market expectations. There was one release that significantly missed market expectations (highlighted in red below) and none that significantly beat market expectations:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Neutral 4/18/2016 NAHB Housing Market Index April 2016 58 59
Neutral 4/19/2016 Building Permits March 2016 1089K 1200K
Neutral 4/19/2016 Housing Starts March 2016 1086K 1170K
Neutral 4/20/2016 Existing Home Sales March 2016 5.33M 5.30M
Neutral 4/21/2016 Initial Claims Previous Week 247K 263K
Neutral 4/21/2016 Continuing Claims Previous Week 2137K 2141K
Negative 4/21/2016 Philadelphia Fed April 2016 -1.6 9.9

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

 

Last week the economic news releases started on Monday with the release of the NAHB housing market index, which posted a reading of 58, a full point lower than the anticipated 59 reading. While the reading was lower, it was not significantly lower and therefore had little impact on the overall markets or the housing related stocks. Building permits and housing starts, both for the month of March and both released on Tuesday, also slightly missed expectations, but these too seemed to have little impact on the overall markets, as the month they were reported for was still not historically a strong month for housing figures due to a large part of the US still being in the throes of winter. On Wednesday existing home sales, much like the other housing related figures last week, came in slightly lower but very close to market expectations, having little impact on the markets of housing stocks. On Thursday the standard unemployment related figures were released with both numbers coming in slightly lower than anticipated, which was positive. However, the markets were focused on the Philadelphia Fed Index for the month of April, which registered a -1.6 reading, while the market had been expecting a reading of 9.9. This release is the opposite of what we saw out of the Empire Index two weeks ago that showed manufacturing expanding in the greater New York area for the first time in 7 months. The Philly number suggests that the pop in New York last month may have just been a one-off event and calls into question the recovery in manufacturing that many economists have been pointing to in the past two weeks. With the data mixed on manufacturing we will have to wait for the next month of data to start rolling in to see if an uptrend has formed or not.

 

This week is a busy week for economic news releases, but as mentioned above all eyes will be on the Federal Reserve meeting:

 

Date Release Release Range Market Expectation
4/25/2016 New Home Sales March 2016 521K
4/26/2016 Durable Orders March 2016 1.70%
4/26/2016 Durable Goods -ex transportation March 2016 0.50%
4/26/2016 Case-Shiller 20-city Index February 2016 5.60%
4/26/2016 Consumer Confidence April 2016 96.7
4/27/2016 Pending Home Sales March 2016 0.30%
4/27/2016 FOMC Rate Decision Current Meeting 0.50%
4/28/2016 GDP-Adv. Q1 2016 0.90%
4/28/2016 Initial Claims Previous Week 259K
4/28/2016 Continuing Claims Previous Week 2135K
4/29/2016 Personal Income March 2016 0.30%
4/29/2016 Personal Spending March 2016 0.20%
4/29/2016 Core PCE Prices March 2016 0.10%
4/29/2016 Chicago PMI April 2016 53.3
4/29/2016 University of Michigan Consumer Sentiment April 2016 90

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

 

This week the economic releases start on Monday with the release of more housing related data as the New Home sales figure for the month of March is released. If this release goes like the previous housing related releases have gone, we will likely see a little bit of a miss on this release, but it will not be enough for the markets to take any notice. On Tuesday the markets will start to focus on the overall US economy and the US consumer as the durable goods orders and consumer confidence are both released. Durable goods orders are expected to have increased during the month of March by 1.7 percent overall and 0.5 percent when excluding transportation, but this indicator can be greatly variable so it would take a very wide deviation from expectations for the markets to really take notice. The big thing that the market will be looking for is that both figures for the durable goods orders remain positive. If either one goes negative we could see an adverse reaction on the main indexes. Consumer confidence is also set to be released on Tuesday, but the release will likely take a back seat to the durable goods orders and we would have to see a wide deviation from expectations for much of a market reaction. On Wednesday the focus will be on the US Federal Reserve even though it is highly unlikely that they will raise interest rates, the Wall Street will still go over the press release very closely for any hints as to when the fed is thinking of increasing rates in the future. On Thursday the advanced estimate of GDP for the first quarter of 2016 here in the US is set to be released and as always this release could impact the overall markets. Expectations are for a 0.9 percent reading, which seems a little low so we could be in for an upside surprise on this release, which should be positive for the markets. On Friday personal income and spending are both set to be released with both expected to show positive, but very small increases during the month of March. Spending is the more important of the two figures as consumer spending plays a very large part in the overall US economy. Later during the day on Friday the Chicago area PMI for the month of April is set to be released and it will be an important figure because it will either lean toward the positive Empire figures released two weeks ago or toward the more negative Philly number that was released last week. Wrapping up the week on Friday is the release of the University of Michigan’s consumer sentiment index for the month of April (final estimate), which is expected to show no change over the reading at the middle of the month.

 

Interesting Fact Triple win for Prince in 1984

Prince SIMULTANEOUSLY HELD THE NUMBER ONE SPOTS FOR FILM, SINGLE, AND ALBUM. During the week of July 27, 1984, Prince’s film Purple Rain hit number one at the box office. That same week, the film’s soundtrack was the best-selling album and “When Doves Cry” was holding the top spot for singles.

 

Source: Billboard

For a PDF version of the below commentary please see my PDF files page located here http://wp.me/Ppr8Z-23

Commentary quick take:

 

  • Market statistics:
    • US markets moved higher last week
    • Increase last week occurred during a risk-on trading week
    • Hopes over OPEC deal drove much of the gains
    • VIX decreased by more than 11 percent last week

 

  • Earnings season officially started last week
    • Earnings have been just okay, helped by cost cutting
    • Financials turned in a good week thanks to earnings
    • This week the releases get going in earnest
    • Expectations for earnings remain low, especially for energy

 

  • “Risk-on” trade occurred last week
    • Investors sold less risky assets in favor of more risky holdings
    • OPEC meeting was one of the driving factors behind the risk-on trades
    • Fed looks likely to delay raising rates longer than first thought

 

  • Oil moved higher last week, ahead of the OPEC meeting
    • US market correlation between oil and equity indexes was positive last week
    • Oil set to move lower to start the week after a failed meeting in Doha
    • No oil production freeze agreement reached at the OPEC meeting

 

  • IMF lowered global growth outlook again in the latest World Economic Outlook

 

  • Uncertainty in Brazil after impeachment vote for President Rousseff in the lower house of Parliament on Sunday

 

  • Hybrid investments strategy update:
    • There were no changes last week in the models as the markets were trading away from many of the defensive positions in the models

 

  • Economic news releases:
    • Last week the economic news releases were mixed
    • This week the focus will be on housing indicators

 

  • This week for the markets:
    • Earnings speculation will be the main topic this week
    • Oil prices will once again come into focus as they are likely to push lower

 

  • Interesting Fact: Infamous Sixteen Impeachments in the US


Major theme of the markets last week: RISK ON! The US and global financial markets were in a full risk-on trading situation last week as investors moved out of assets seen as being safe haven assets in favor of more risky assets. Telltale sectors of the markets such as Real Estate, Consumer Staples, Consumer Products and Utilities all struggled to perform well last week as higher risk sectors of the markets such as Financials, Energy and Small Cap stocks all pushed higher. During the risk-on trade, volatility as measured by the VIX pushed lower by more than 10 percent, ending the week near the lowest point we have seen over the past year. If there was economic risk associated with a specific company it probably had a good week last week. The same can be said about countries as well, as money seemed to be leaving the developed countries in favor of the emerging market countries; even countries such as Japan had a strong week despite the very obvious troubles that lie ahead in terms of economic uncertainty. Driving forces behind the risk on trade seen last week included earnings season in the US starting off better than expected, oil prices continuing to rebound and a poor IMF report that investors took as positive as it may contribute to keeping US interest rates low for longer than anticipated.

 

US news impacting the financial markets: The main news story that hit the US media that impacted the financial markets was the start of the first quarter 2016 earnings season. Several of the largest banks in the US reported earnings last week and in general profits were down, but the companies still posted better than expected earnings numbers, primarily by cutting expenses during the quarter. The market, however, did not seem to care much for how the companies beat earnings, just that they did beat analyst expectations. In fact, according to Factset Research, companies that have beaten earnings expectations so far for the first quarter of 2016 have enjoyed an average gain of 2.3 percent for the week around the earnings release (two days prior through two days after). This may seem somewhat normal, but the figure is almost double what the average has been over the past five years. The more surprising aspect to earnings season thus far is the fact that when a company missed earnings expectations, they have on average gained 0.3 percent, while historically they have lost 2.2 percent during the week around earnings. In short, so far during this first quarter earnings season, companies are being rewarded if they beat or fall short of earnings expectations, but we are still only about 7 percent of the way through earnings season, so a lot could change in the coming weeks. With earnings season off to such a strong looking start it was not surprising to see that investors decided to increase the risk of their investments during the week, pushing many of the best performing sectors of the markets over the past several months lower. As you can see below in the next section, there has been a lot made about the start of earnings season, but it is only the start and rarely does a full earnings season turn out to be anywhere close to how it starts off.

 

Last week was the official start of earnings releases for the first quarter of 2016, with Alcoa kicking things off. 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 250% Citigroup 7% Kinder Morgan pushed
Bank of America -5% CSX 0% Progressive -16%
BlackRock -1% Delta Air Lines 2% Reynolds American pushed
Charles Schwab 0% JPMorgan Chase 7% Wells Fargo 1%

 

Alcoa kicked things off last week with an earnings beat that came in better than the market had expected, beating estimates by $0.05. However, it was not all positive for Alcoa last week as the company lowered its overall guidance for the company for the rest of 2016, citing lower demand from the aerospace and defense sector as well as a business division it is planning on spinning off into a separate company. But, Alcoa kicked things off positively, so if the saying holds true, this quarter earnings could be better than expected. As mentioned above, the financial firms that released their earnings last week were mostly positive, largely due more to financial wizardry and accounting magic than to actual increases in revenues, as companies cut many expenses during the quarter to look better at the end of the quarter.

 

According to Factset Research, we have seen 35 (7 percent) of the S&P 500 companies release their results for the first quarter of 2016. Of the 35 that have released, 71 percent have met or beaten earnings estimates, while 29 percent have fallen short of expectations. When looking at revenue of the companies that have reported, 60 percent of the companies have beaten estimates, while 40 percent have fallen short. If these numbers hold throughout the quarter it would be a very positive quarter for earnings results. All of the above percentages are somewhat unreliable as we have such a small sampling of companies that have reported earnings so far for the first quarter of 2016. We should have a much clearer picture of how earnings season will go after this week when we have 109 of the S&P 500 component companies report their results. We also start to see the earnings of the energy industry, which will likely be very poor despite the price of oil moving upward for the back half of the quarter.

 

This week there are a much higher number of companies reporting earnings (657 in total) across many different industries. The table below shows the companies that have the greatest potential to move the markets highlighted in green:

 

Abbott Laboratories Honeywell International PulteGroup
Advanced Micro Devices Intel RLI
Alphabet International Business Machines Royal Caribbean Cruises
American Airlines J B Hunt Transport Services Sherwin-Williams
Bank of New York Mellon Johnson & Johnson Southwest Airlines
Biogen Kimberly-Clark Stanley Black & Decker
Blackstone Kinder Morgan Starbucks
Caterpillar Las Vegas Sands Stryker
Coca-Cola Manpower Group Swift Transportation
D.R. Horton Mattel U.S. Bancorp
DISH Network McDonald’s United Continental
General Electric Microsoft United Rentals
General Motors Morgan Stanley United Health
Genuine Parts Netflix Verizon Communications
Goldman Sachs Nucor Visa
Hanesbrands Pepsi Yahoo!
Harley-Davidson Philip Morris International Yum! Brands

 

Google (Alphabet) will probably be the most closely watched earnings release this week and also the release with the most potential for moving the overall markets. It seems to be a bellwether company for all of the technology sector as it has now expanded into many different areas of technology. IBM, Intel and Microsoft will round out the major technology companies that will be closely watched. Visa, which releases earnings later in the week will be very closely watched as the company has some of the best data about consumer spending of any companies in the world because so many people and businesses use Visa credit cards. If Visa misses expectations, it could lead to investors thinking that consumer spending may fall in the near term, which could be poor for the equity indexes both here in the US and around the world. Consumer staple companies also start to release earnings this week as J&J, Kimberly Clark, Coca-Cola and Pepsi all release their earnings. One theme to watch for this quarter is the impact of the movement of the US dollar on multinational corporations as currency movements can either add or remove billions of dollars from earnings very quickly. Oil is also something that will likely be cited by more than just a couple of the companies that release earnings this week and we seem to be headed into a very volatile time for oil.

 

Global news impacting the markets: Oil was the main news story on the international front that had an impact on the global markets with much speculation about the OPEC meeting held over the past weekend in Doha, Qatar. The OPEC meeting was one of the two scheduled production meetings the group has on an annual basis. Emergency and other meetings can be called at almost any time, so there are far more meetings than just two, but this was one of the main ones. Going into the meeting there was a lot of speculation that the production freeze that had been floated by Russia and Saudi Arabia back in the middle of February would actually be finalized at this meeting. However, politics and religion seemed to be in the way of a deal as the Saudis said there would not be a deal unless Iran agreed to freeze production at January levels. Iran decided to skip the meeting in Doha altogether. Many traders and economists around the world had been speculating that the price of oil was too valuable to all of the OPEC countries for a spat between two countries to derail the whole agreement—a spat that may be religiously based—but that is exactly what happened. To Iran’s credit, there is little incentive to agree to an agreement that essentially keeps its oil production severely cut back to the levels it experienced under international sanctions in January when it was not exporting much crude at all. Iran has only recently been allowed to ship crude around the world after years of sanctions; if Iran had agreed to the freeze, it would have essentially kept the market shares of Saudi Arabia and other countries in tact, while keeping Iranian oil out of the global markets.

Without Iran signing on to the deal, the Saudis decided not to back the deal either. Without the support of Saudi Arabia, OPEC has almost no say over oil prices or production. After the fallout of the meeting was made known, the price of oil fell by at least 7 percent around the world as all of the bullishness on oil prices seemed to evaporate even faster than the production freeze deal. The decline in oil prices was short lived. More than half of the losses were recovered prior to the markets opening here in the US as a strike in Kuwait by oil field workers temporarily took more than 60 percent of the country’s oil production off the table. The strike has been happening now for 2 days, but like most oil production strikes in the Middle East, the government in Kuwait will likely bow to the demands of the protesters as significantly less oil production for even just a few days has a much larger negative impact on the country than giving the striking workers what they want. In the longer term, the run up in the price of oil that we have seen since the middle of February is now in question as the freeze in production was the primary driving force behind the increase. It seems that as oil prices move lower, the OPEC members in disagreement about production levels will likely come together and agree to some kind of production cut, but with so many countries involved and many different angles being played, anything can happen with the OPEC production. Contributing to the oversupply of oil in the world markets, oil demand has been flat now for two quarters and likely moved lower during the first quarter of 2016 once the final numbers come in. There is typically a dip in demand during the first quarter of a year as the northern hemisphere is in and coming out of winter. The chart below is from the IEA and shows the global demand for oil in millions of barrels of oil per day. The first quarter 2016 bar has yet to be drawn:

world oil demand 4-18-16

The other global news story that seemed to have an impact on the markets, at least the regional markets, was Brazil and the impeachment of President Dilma Rousseff. On Sunday, the lower house of Parliament in Brazil voted to impeach the current President of Brazil over charges of corruption and mismanagement of government funds. With Brazil being in the international spotlight already for its handling of the Zika virus and the upcoming Summer Olympic Games, having a President being impeached is just one more thing going poorly for the struggling country. Up next in Brazil is a vote in the Senate to see if the charges against the President will stand. There are also two potential appeals the President can attempt. If the Senate does “confirm” the impeachment and the appeals are completed, President Rousseff would immediately be taken out of office. Were this to happen it would increase the uncertainty in the region, and with Brazil being such a large commodity supplier around the world it could have a negative impact on other countries as well. The final global news item to impact the financial markets last week came from the IMF and it was not positive.

 

Last week the International Monetary Fund (IMF) released its semiannual world economic outlook in which it lowered its expectations for 2016 globally in terms of GDP Growth. GDP was lowered from 3.4 percent down to 3.2 percent as a wide range of countries saw downgrades in growth. Japan saw its growth expectations cut down to 0.5 percent from 1 percent in the last outlook, while Brazil was cut to a contraction of 3.8 percent this year, down from 3.5 percent in the previous report. One bright spot in the report is that the IMF now thinks China will grow faster than previously expected, increasing from 6.3 percent up to 6.5 percent growth during 2016. A few  of the reasons the IMF outlined for why it lowered the overall expectations in global GDP for 2016 include the refugee situation in Europe, a potential Brexit, volatility in the financial markets around the world and central bank uncertainty.

 

Technical market review: One of the three major US indexes managed to break above a resistance level, while another came close and the third made no real attempt at even closing the gap. The charts below show each of the three major indexes, plus the VIX, drawn with green lines. The red lines on the three major indexes depict the closest resistance levels the indexes may hit in the coming trading weeks, as represented by points that have been tested on each index several times in the last 6 months. For the VIX, the red line remains the rolling 52-week average level of the VIX.

4 charts combined 4-18-16

The Dow (upper right pane above) is the strongest of three major indexes, despite the NASDAQ (lower left pane above) breaking above its most recent support level. In second place in terms of strength is the S&P 500 (upper left pane above) as it has yet to make it above its previous high points from October and November (the straight line drawn across these two points make the resistance level). The NASDAQ is in third despite it having a good week last week and moving above a resistance level. The index still has a significant way to go in order to achieve the resistance level that would be drawn at the high point of November and December of 2015.

 


Market Performance: Last week saw all three of the major US indexes move higher on a risk-on trading week:

 

Index Change Volume
Dow 1.82% Below Average
NASDAQ 1.80% Below Average
S&P 500 1.62% Average

 

One of the surprising aspects to the trading week last week was that the telltale signs of a risk-on week were in place and yet the Dow performed the best of the indexes. Typically, the NASDAQ leads the way higher in a risk-on trading environment, but earnings expectations for many of the Dow component companies turned the tide and pushed the index to the best performance of the week.

 

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

 

Top 5 Sectors Change Bottom 5 Sectors Change
Regional Banks 6.38% Residential Real Estate -1.49%
Financial Services 5.75% Technology -0.71%
Materials 5.49% Pharmaceuticals -0.35%
Broker Dealers 5.39% Consumer Goods 0.12%
Financials 5.01% Utilities 0.19%

As mentioned earlier, anything related to financials seemed to have a good week last week as a large number of the key companies in the sector turned in results that beat expectations, despite the positive news being almost entirely due to expenses being cut. On the flip side, as mentioned above, many of the historically defensive sectors had a rough week last week with Real Estate, Consumer Goods and Utilities taking three of the bottom five sector positions.

Fixed income markets were all negative last week as investors moved away from the safety of fixed income and into the more risky equity side of investments:

Fixed Income Change
Long (20+ years) -0.10%
Middle (7-10 years) -0.28%
Short (less than 1 year) -0.01%
TIPS -0.46%

Currency trading volume was average last week after seeing elevated volume for the prior three weeks, thanks to movements in the Japanese Yen. The US dollar increased by 0.49 percent against a basket of foreign currencies, as speculators continue to think the Fed will have a difficult time increasing interest rates more than twice during 2016. The best performance of the global currencies last week was the Australian Dollar as it gained 2.22 percent against the value of the US dollar. The increase in the value of the Australian Dollar was due to the strong upward movement seen in both the Copper and the Silver markets last week as metals and mining play a key role in the Australian economy. The weakest of the major global currencies last week was the Swiss Franc as it declined by 1.47 percent against the value of the US dollar.

Commodities were mixed over the course of the previous week, as Oil moved higher, while Gold and Livestock moved lower:

Metals Change Commodities Change
Gold -0.43% Oil 2.19%
Silver 5.75% Livestock -2.61%
Copper 3.76% Grains 3.80%
Agriculture 1.23%

The overall Goldman Sachs Commodity Index advanced by 1.86 percent last week, as oil increased 2.19 percent on hopes of a production freeze out of the OPEC meeting, a freeze that did not materialize over the weekend. The major metals were mixed last week with Gold selling off (-0.43 percent) as it was viewed as a safe haven asset in favor of the more industrially used Silver and Copper, which gained 5.75 and 3.76 percent respectively. Copper’s move last week made back almost exactly half of what the metal had declined over the previous two weeks. Soft commodities were mixed last week with Livestock falling 2.61 percent, while Grains advanced 3.80 percent and Agriculture overall moved higher by 1.23 percent.

Last week most of the global equity indexes moved higher, while moving in lock step with the US markets. The best performing index outside of the US last week was found in Japan, which turned in a gain of 6.5 percent, as the Yen stabilized and even moved slightly higher last week on manufacturing data. The worst performing index last week was found in Indonesia and was the Jakarta Composite index, which turned in a loss of 0.5 percent for the week.

The VIX moved lower last week during the risk-on trading week, falling by 11.33 percent. The VIX is now at roughly the same low point it has reached three times in the past two months, which is the lowest point in the past year. The index seems to be pricing in everything with the financial markets and the global economy moving forward without any hiccups. This seems a little too optimistic. The current reading of 13.62 implies that a move of 3.93 percent is likely to occur over the next 30 days. As always, the direction of the move is unknown.

For the trading week ending on 4/15/2016, returns in the hybrid hypothetical models* (net of a 1% annual management fee) were as follows:

  Last Week 2016 YTD Since 6/30/2015
Aggressive Model 0.45 % 1.76 % 6.11 %
Aggressive Benchmark 2.23 % 0.99 % -4.15 %
Growth Model 0.24 % 1.62 % 4.99 %
Growth Benchmark 1.73  % 0.84 % -3.07  %
Moderate Model -0.02 % 1.41 % 4.16 %
Moderate Benchmark 1.24 % 0.67 % -2.06 %
Income Model -0.25 % 1.85 % 4.50 %
Income Benchmark 0.62 % 0.40 % -0.89 %
S&P 500 1.62 % 1.80 % 0.85 %

*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. In general the hybrid models remain almost fully invested, but with the investments currently in the models being low volatility focused. The holdings in the models tend to perform well in times of uncertainty, but are susceptible to underperformance in times of risk-on trading. Investments that we are closely watching and would like to purchase at some time in the future include Oil and Gas, Energy and Healthcare and to fill out the current partial positions in Transportation and Technology.

 

Economic Release Calendar: Last week was a typical mid-month week for economic news releases with the data overall coming in mixed. There were two releases that significantly missed market expectations (highlighted in red below) and one that significantly beat market expectations (highlighted in green):

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Neutral 4/13/2016 PPI March 2016 -0.10% 0.30%
Neutral 4/13/2016 Core PPI March 2016 -0.10% 0.20%
Negative 4/13/2016 Retail Sales March 2016 -0.30% 0.10%
Slightly Negative 4/13/2016 Retail Sales ex-auto March 2016 0.20% 0.40%
Neutral 4/14/2016 CPI March 2016 0.10% 0.30%
Neutral 4/14/2016 Core CPI March 2016 0.10% 0.20%
Neutral 4/14/2016 Initial Claims Previous Week 253K 268K
Neutral 4/14/2016 Continuing Claims Previous Week 2171K 2162K
Positive 4/15/2016 Empire Manufacturing April 2016 9.6 2.3
Negative 4/15/2016 University of Michigan Consumer Sentiment April 2016 89.7 92

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

 

The economic news releases last week started out on Wednesday with the release of the Producer Price Index (PPI) and the retail sales figures, both for the month of March. The PPI showed that prices at the producer level declined by one tenth of a percent, both overall and when looking at core PPI, which is not a positive sign for the Fed having the ability to increase interest rates. In fact, in normal economic cycles the Fed would actually be cutting interest rates if prices were consistently falling to try to boost information (positive price movement). Retail sales overall came in worse than anticipated last week, falling by 0.3 percent, while expectations had been for an increase of 0.1 percent. The fallout of the release was somewhat muted because retail sales excluding auto sales were still positive as they registered growth of 0.2 percent for the month. On Thursday the Consumer Price Index (CPI) was released as was the standard weekly unemployment claims figures. Both CPI numbers posted a gain of 0.1 percent, well below the Fed’s target rate of 2 percent on an annualized basis. The two jobless figures came in mixed, but close enough to expectations that there was no noticeable impact on the overall markets by the releases. Friday was a very mixed day for economic news releases as the Empire Manufacturing index turned in a strong positive reading of 9.6, while the markets had been expecting only 2.3. Remember that this is the index that had been posting negative numbers in 7 of the last 8 months, so this turnaround was a big deal and a very positive development. The positive feeling was short lived on Wall Street, however, as the University of Michigan came out with its Consumer Sentiment Index at the same time and showed that sentiment in the US has decreased since the final reading of March. Maybe everyone in the US is just a little unhappy about having to pay the taxes they owe for 2015!

 

This week is a slower week than normal for economic news releases with only one release that has the potential of moving the markets on the day it is released. The markets in general will be much more focused on earnings season, as discussed above:

 

Date Release Release Range Market Expectation
4/18/2016 NAHB Housing Market Index April 2016 59.00
4/19/2016 Building Permits March 2016 1200K
4/19/2016 Housing Starts March 2016 1170K
4/20/2016 Existing Home Sales March 2016 5.30M
4/21/2016 Initial Claims Previous Week 263K
4/21/2016 Continuing Claims Previous Week 2,171K
4/21/2016 Philadelphia Fed April 2016 9.9

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

 

This week starts off on Monday with the release of the NAHB housing market index for the month of April with expectations of a reading of 59 being seen, which would mean that the US housing prices are growing, but not growing as fast as they had been a year ago. On Tuesday, two more housing related figures are released, those being building permits and housing starts, with more than 1 million units expected on both indicators. On Wednesday, existing home sales for the month of March round out the housing figures for the week. In aggregate, if we get all positive figures from the housing data it would be seen as bullish for the US housing markets and potentially very positive for the home building companies. On Thursday the standard weekly unemployment related figures are set to be released with little change expected over the figures seen last week. Later on Thursday we will see if the Empire Manufacturing index figure from last week was a single time event or if there is more to the recovery that was seen in New York, as the Philadelphia Fed releases its latest business conditions index, in which manufacturing data for the region is also provided. It also looks like it is a slow week for Fed officials giving speeches as there are only three scheduled speeches this week, so that should have very little impact on the markets as well. Earnings will be the driving force behind the markets for the majority of this week.

 

Interesting Fact — Infamous Sixteen Impeachments in the US

 

Since 1797 the House of Representatives has impeached sixteen federal officials. These include two presidents, a cabinet member, a senator, a justice of the Supreme Court, and eleven federal judges. Of those, the Senate has convicted and removed seven, all of them judges. Not included in this list are the office holders who have resigned rather than face impeachment, most notably, President Richard M. Nixon.

 

Source: “A Short History of Impeachment” Borgna Brunner

For a PDF version of the below commentary please see my PDF Page here http://wp.me/Ppr8Z-23

Commentary quick take:

 

  • Market statistics:
    • US markets moved lower last week
    • Decline last week was only the second weekly decline in the last two months
    • Volume remains low in the downward movement
    • VIX increased by more than 17 percent last week

 

  • Interesting Federal Reserve Chairperson panel discussion
    • Chair Yellen and past chairs Bernanke, Volker and Greenspan
    • Bubble economy was a hot topic of the session
    • Chair Yellen continued to stand by the decision back in December 2015, when the Fed increased rates
    • Kept options open for future meetings and when interest rates will be increased again

 

  • Earnings season for the first quarter of 2016 is just about to start
    • Alcoa kicks things off this quarter with earnings being released on Monday
    • Financials and big banks make up the majority of the well-known companies releasing earnings this week
    • Expectations for earnings being reported are very low

 

  • Oil moved higher last week, ahead of the OPEC meeting on April 17th
    • Negative correlation between US financial market and oil persisted
    • Oil reserves in the US were shown to have declined meaningfully

 

  • Japan continues to struggle to find stable economic footing

 

  • Hybrid investments strategy update:
    • There were no changes last week in the models

 

  • Economic news releases:
    • Slow week last week with all releases coming in very close to expectations
    • Big week this week for inflation indicators
    • Retail sales could have a noticeable impact on the markets this week

 

  • This week for the markets:
    • Earnings speculation will be the main topic this week
    • OPEC meeting on April 17th and the potential effect on oil prices

 

  • Interesting Fact: Amsterdam is built entirely on poles


Technical market review: Last week saw the three main US indexes move down slightly, reversing the trend that has been in place for the past two months as the markets rallied on the rise of the price of oil. Last week was only the second week in the last eight that saw all three of the markets move lower. The charts below show each of the three major indexes, plus the VIX, drawn with green lines. The red lines on the three major indexes depict the closest resistance levels the indexes may hit in the coming trading weeks, as represented by points that have been tested on each index several times in the last 6 months. For the VIX, the red line remains the rolling 52-week average level of the VIX.

4 charts combined 4-11-16

From a technical perspective very little changed last week. All three indexes failed to break above their closest technical resistance levels, but also failed to move down enough to say they broke down in a meaningful way. The NASDAQ (lower left pane above) remains the weakest of the three indexes as it has now bounced twice off its nearest resistance level. Both the S&P 500 (upper left pane above) and the Dow (upper right pane above) are tied in terms of technical strength.

 

One aspect of the recent run-up in the markets that keeps coming up in the media is the rarity of the “V” shaped recovery we have seen in the markets. It is true that it is rare for major financial markets to go from a downward trend to an upward trend at a single point in time. However, with the price of oil being the catalyst for the market decline going into February and oil reversing course due to an OPEC announcement, it is not as difficult to understand the shape of the market recovery. But with oil being the driving force behind the recent market movement, it could lead to increased volatility in the near term if oil prices turn around yet again and start to move back down. We could get some clarity about the future movement of oil prices later this week as an OPEC meeting takes place on the 17th, at which the participants are supposed to hammer out the details of the oil production “freeze,” which when announced back in February started the market rally. If we see oil prices move back down below $30 per barrel it is likely the financial markets will push lower. But between the current price of about $42 per barrel and something in the low $30’s, oil prices could actually be a positive for the economy as consumers in theory have more money to spend on other goods and services as they are spending less to fill up their vehicles with gas. Additionally, companies reliant on shipping parts and products nationally and internationally will theoretically have lower costs and thus have more to allocate to employees or capital expenditures.

 

US news impacting the financial markets: Potential actions by the Federal Reserve and the timing of those actions, in addition to the first quarter earnings season, dominated the US media impacting the financial markets last week. On Thursday last week there was an unprecedented event in New York City as the current chair of the Federal Reserve was joined by the three immediate past chairs of the Federal Reserve who are still alive. The event was the inaugural event for the Paul A. Volcker Distinguished Speaker Program and was held at the International House of New York. It was moderated by Fareed Zakaria. The title of the session was “Decision making at the Federal Reserve,” and while there was no new information about the timing of the next increase in the Fed funds rate by Chair Yellen, it was very interesting to hear the various Fed leaders’ thoughts on several topics. The topic that Wall Street seemed to take the most interest in was the question of whether the US economy is currently inflating a bubble with the ultra-low interest rate environment extending for such a long period of time. The answers from the Fed chairs were unanimous that there was little chance of a bubble inflating due to the low interest rates. Chair Yellen was the most eloquent in her answer and outlined much in the same fashion as she did two weeks ago at the New York Economic Club her reasoning behind where she thinks the US economy is currently. She continued to say that the Fed will be cautious in its approach to increasing rates further. Chair Bernanke took an interesting question about if a recession were to occur now, would the Fed have the tools it needs to combat the situation given that in past recessions the Fed has historically lowered interest rates by 3.5 percent, something that obviously cannot be done now with rates at only 0.25 to 0.5 percent. He concluded that the Fed has many tools in its toolbox and that lower interest rates is just one way the Fed can have an impact on an economy that is experiencing a recession. The panel wrapped up with a short discussion about foreign economies and the strength of the US dollar. None of the panel members thought the US dollar was under any threat in the near term to losing the reserve currency status to the Chinese Yuan, and they thought that in general the US economy was still one of the best economies in the world and that it would be for the foreseeable future. When the markets opened on Friday there was almost no change in the expected time frame for the Fed increasing interest rates, with only a 3 percent chance of rates being increased at the April meeting of the FOMC. Looking further out, there are still only two increases anticipated during 2016, or less. The other major US news that had an impact on the financial markets last week was the upcoming earnings season for the first quarter of 2016.

 

First quarter 2016 earnings season officially kicks off today after the market closes with Alcoa releasing its earnings report. With Alcoa being a very large multinational aluminum company, it has been dubbed the company that officially kicks off earnings every quarter. One thought that is common on Wall Street is that if Alcoa beats earnings estimates then the quarter’s results for the overall markets will likely be better than expected and vice versa if it falls short of expectations. Aluminum touches so many different industries both here in the US and around the world that the company has a good feel for a wide variety of industrial companies based on shipments made during the quarter and on orders placed for future shipments.

 

This week is the start of earnings reporting season and with it there are several well-known companies that report earnings that could have an impact on the overall markets. The table below shows the companies that have the greatest potential to move the markets highlighted in green:

 

Alcoa Citigroup Kinder Morgan
Bank of America CSX Progressive
BlackRock Delta Air Lines Reynolds American
Charles Schwab JPMorgan Chase Wells Fargo

 

As mentioned above, Alcoa will be very closely watched for the overall direction of earnings season, but a few of the large financial institutions may have more of a noticeable impact on the markets this week. With JP Morgan, Bank of America, Wells Fargo and Citigroup all releasing earnings during the same week, and in most cases on the same day, the markets could get very jittery if earnings come in below expectations. Expectations for earnings overall this quarter are very low, with energy of course leading the way downward as oil prices remained very depressed for much of the first quarter. It is expected that earnings on the S&P 500 will have declined in total dollar terms on a quarter over quarter basis for the fourth consecutive quarter with Energy being blamed for the majority of the decline. With such a low bar having been set for the quarter, it brings in an interesting phenomena of companies actually beating expectations and yet still seeing their stock prices decline due to lowered outlooks for 2016 and uncertainty in general moving forward. This type of movement could also make it harder for the Fed to increasing rates at any of the next three meetings as market volatility is now one of the factors chair Yellen has singled out that she is watching.

 

Global news impacting the markets: Japan, Europe and Oil were all global news stories that last week had an impact on global equity markets. In Japan, the government and the Bank of Japan (BOJ) just can’t seem to catch a break from the international and national investing community. In an article on Bloomberg last week the authors outlined what has been happening in Japan as investors seem to be losing faith in Abenomics saving the day and turning around the Japanese economy, which can arguably be said has been stuck in neutral for the last 25 years. According to the article, over the past 13 weeks Japan has seen $46 billion pulled from its financial markets as the risks of massive economic failure increase. Negative interest rates don’t seem to be doing much, other stimulus efforts by the BOJ don’t seem to be working and the value of the Yen has been sky rocketing, making exports all that much more expensive to foreign buyers and has been hurting exporters in Japan. The chart from Bloomberg of the US dollar versus the Yen is shown to the right and as you can see the Yen has increased in value versus the US dollar, moving from 123 Yen per dollar down to 108 Yen per dollar in just four and a half months. This is an opposite movement from what the BOJ has been trying to accomplish and shows that its actions thus far have been well intentioned, but not very effective. With Japan being the second largest economy in the world behind the US, trouble in Japan can easily spill over into other countries within the region. Another region that looks to be headed for a rocky few months is Europe.

Yen 4-11-16

Last week I mentioned that Greece is once again coming up against a deadline to get a deal worked on to secure the next tranche of its bailout funds from the IMF and other creditors. That deal has so far not materialized as pension and tax reforms are once again the sticking points Greece does not want to give into and yet the creditors are demanding. The Netherlands got into the mix last week as the country held a referendum vote that rejected a trade deal with Ukraine. While it is unlikely that the single country voting against a trade deal will stop Ukraine from integrating further with the European Union, it does raise some questions about the future of the EU as one cohesive unit and it comes at a very interesting time for the EU with the potential Brexit on the horizon. It still looks too early to call which way the referendum vote in the UK will go, but there is at least still a chance that the UK will break off from the rest of the EU and become much less integrated with the organization. With this chance comes uncertainty and uncertainty can drive markets, so the closer we get to the vote in the UK in June the more volatility I expect we will see in the European financial markets. Oil was the final major global news story that impacted markets last week as the upcoming OPEC meeting seems to be the focal point of the media.

 

OPEC will hold a meeting on April 17th in Doha to discuss production and the price of oil. The main topic will likely be the “freeze,” which was reported back in the middle of February and started oil moving higher along with the global financial markets. This is the meeting that the details of a “freeze” should be hammered out and yet it does not look like this will be the case as Iran has not even confirmed if it will be attending the meeting. Iran’s absence would be a problem since Saudi Arabia has announced it will agree to the freeze only if Iran agrees to it. So far, Iran has said it sounds like a good idea for OPEC to undertake, but that it will not be taking part in the agreement. From the Iranians’ standpoint (religiously, the country is opposed to the ruling party in Saudi Arabia), why would they want to lock into an agreement that would keep production at the level it was in January when they were still under international sanctions and not producing much oil for export? They would not want to do this at all. Plus, despite talks of a freeze, the latest numbers on oil production show that the main oil producers that are part of OPEC, as well as Russia, increased production during February above the so called freeze level. If an agreement is not reached on Sunday at the meeting we will likely see oil prices nose dive as the global supply and demand of oil has not significantly changed over the past two months, yet the prices of oil have increased, all based on this deal being worked out.

 

Market Performance: Last week saw all three of the major US indexes move lower to start the second quarter of 2016:

 

Index Change Volume
S&P 500 -1.21% Average
Dow -1.21% Below Average
NASDAQ -1.30% Below Average

 

Volume was average on the S&P 500, but below average on the other two indexes, meaning that participation in the markets to the downside was lower than it has been over the last year. The trading last week on the major indexes looked like consolidation trading more than anything else, meaning that investors and money managers were making small adjustments in their positions throughout the week rather than making large changes to positions.

 

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

 

Top 5 Sectors Change Bottom 5 Sectors Change
Oil & Gas Exploration 3.87% Broker Dealers -6.52%
Pharmaceuticals 3.66% Financial Services -3.53%
Biotechnology 3.37% Regional Banks -3.29%
Natural Resources 2.49% Insurance -3.27%
Energy 2.13% Financials -2.78%

With oil up nearly 7.5 percent over the course of the past week it was not surprising to see that Oil and Gas Exploration was the top performing sector of the markets last week. Pharmaceuticals and Biotechnology made up positions two and three of the top performing sectors last week, thanks in part to Valeant Pharmaceuticals gaining more than 20 percent during the week after declining more than 70 percent two weeks ago after issuing a horrible earnings report for the fourth quarter of 2015 and lowering its outlook for 2016, thanks to much slower than anticipated sales. Financials and financial related companies made up the entire bottom 5 performing sectors of the markets last week as the low interest rate environment here in the US, combined with weakness in Europe and Asia as well as increased regulation globally, has hurt them on nearly all fronts. It will be very interesting this week to see how the first quarter of 2016 went for the big banks as they are the leadoff sector for earnings season.

Fixed income markets were all positive last week as investors continue to think the Fed will be very slow to increase interest rates this year given the economic uncertainty globally:

Fixed Income Change
Long (20+ years) 1.02%
Middle (7-10 years) 0.66%
Short (less than 1 year) 0.05%
TIPS 0.11%

Currency trading volume was higher than usual last week with the Yen moving by more than 3 percent and currency traders around the world having to adjust to the movement. The US dollar decreased by 0.45 percent against a basket of foreign currencies, as speculators continue to think that the Fed will have a difficult time increasing interest rates more than twice during 2016. The best performance of the global currencies last week was the Japanese Yen as it gained 3.20 percent against the value of the US dollar. The weakest of the major global currencies last week was the Australian Dollar as it declined by 1.61 percent against the value of the US dollar. Weakness in the Australian dollar last week seemed to be related to the falling copper prices as Copper is one of the country’s main exports.

Commodities were mixed over the course of the previous week, as Oil jumped higher, while Copper and Agriculture moved lower:

Metals Change Commodities Change
Gold 1.28% Oil 7.50%
Silver 1.95% Livestock 0.84%
Copper -4.43% Grains -0.16%
Agriculture -0.98%

The overall Goldman Sachs Commodity Index advanced by 3.26 percent last week, as oil ran up by 7.5 percent ahead of this week’s OPEC meeting and on hopes of securing a deal to freeze oil production as well as a large decline in oil inventories being reported here in the US. The major metals were mixed last week with Gold and Silver turning in positive returns of 1.28 and 1.95 percent respectively, while Copper pushed downward by 4.43 percent for the week. Copper’s two week decline is now more than 7.5 percent thanks to slowing demand out of China. Soft commodities were mixed last week with Livestock gaining 0.84 percent, while Grains declined 0.16 percent and Agriculture overall moved lower by 0.98 percent.

Last week most of the global equity indexes moved lower, while moving in lock step with the US and Chinese equity markets. The best performing index outside of the US last week was found in Switzerland, which turned in a gain of 1.7 percent. The increase in the Swiss market was attributed to the strength of its currency relative to the Euro and the British pound and to the Panama Papers scandal, which took the spot light off of the banking system in Switzerland and focused on the people moving money through Panama to skirt taxes around the world. The worst performing index last week was found in Mexico and was the Bolsa index, which turned in a loss of 2.6 percent for the week.

The single digit, double digit trend that we had been seeing for the past 13 weeks on the VIX finally came to an end last week as we saw a second week in a row with a double digit move, breaking the pattern. The VIX gained some ground last week in what turned out to be a very volatile trading week for the VIX. In total, it gained 17.25 percent for the week, ending the week at 15.36. The current reading of 15.36 implies that a move of 4.43 percent is likely to occur over the next 30 days. As always, the direction of the move is unknown. There was not really a single specific catalyst for the VIX movement last week as investors seemed to be reassessing the risk in the markets and coming to the conclusion that the fear gauge was too low.

For the trading week ending on 4/8/2016, returns in the hybrid hypothetical models* (net of a 1% annual management fee) were as follows:

Last Week 2016 YTD Since 6/30/2015
Aggressive Model -0.91 % 1.31 % 5.63 %
Aggressive Benchmark -0.50 % -1.21 % -6.24 %
Growth Model -0.82 % 1.37 % 4.73 %
Growth Benchmark -0.38  % -0.87 % -4.72  %
Moderate Model -0.71 % 1.43 % 4.18 %
Moderate Benchmark -0.28 % -0.57 % -3.26 %
Income Model -0.71 % 2.11 % 4.77 %
Income Benchmark -0.13 % -0.22 % -1.51 %
S&P 500 -1.21 % 0.18 % -0.75 %

*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. In general the hybrid models remain almost fully invested, but with the investments currently in the models being low volatility focused. The holdings that are in the models tend to perform well in times of uncertainty, but are susceptible to underperformance in times of risk-on trading. Investments that we are closely watching and would like to purchase at some time in the future include Oil and Gas, Energy and Healthcare and to fill out the current partial positions in Transportation and Technology.

 

Economic Release Calendar: Last week was a very slow week for economic news releases as we had only 5 releases, none of which significantly beat or fell short of market expectations:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Neutral 4/5/2016 ISM Services March 2016 54.50 54.00
Neutral 4/6/2016 FOMC Minutes Previous Meeting N/A N/A
Neutral 4/7/2016 Continuing Claims Previous Week 2191K 2173K
Neutral 4/7/2016 Initial Claims Previous Week 267K 270K
Neutral 4/7/2016 Consumer Credit February 2016 $17.3B $14.40B

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

 

Last week the economic news releases started on Tuesday with the release of the Services side of the ISM index. Much like the overall ISM index two weeks ago the service index came in just slightly better than was anticipated and was a non-market moving release. On Wednesday the FOMC meeting minutes from the previous meeting were released and held no new or meaningful information as the Fed still is saying and looking like it wants to increase rates twice during 2016 with a quarter of a point increase expected each time the rate is raised. On Thursday the standard weekly unemployment related figures were released with both figures coming in very close to expectations and having no noticeable impact on the overall markets. Wrapping up the week last week was the release of the consumer credit report for the month of February, which came in better than expected, but much of that is due to people refinancing home loans in advance of higher interest rates later this year.

 

This week is a typical week in terms of the number of economic news releases, but there are a few releases that could impact the Fed’s thinking at the upcoming FOMC meeting that will likely garner a lot more attention than normal (highlighted in green below):

 

Date Release Release Range Market Expectation
4/13/2016 PPI March 2016 0.30%
4/13/2016 Core PPI March 2016 0.20%
4/13/2016 Retail Sales March 2016 0.10%
4/13/2016 Retail Sales ex-auto March 2016 0.40%
4/14/2016 CPI March 2016 0.30%
4/14/2016 Core CPI March 2016 0.20%
4/14/2016 Initial Claims Previous Week 268K
4/14/2016 Continuing Claims Previous Week NA
4/15/2016 Empire Manufacturing April 2016 2.3
4/15/2016 University of Michigan Consumer Sentiment April 2016 92

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

 

This week the economic news releases kick off on Wednesday with the release of the Producer Price Index (PPI) for the month of March. Overall prices are expected to have increased at the producer level by 0.3 percent, while core PPI is expected to show an even smaller increase, gaining only 0.2 percent. Both of these figures, if they come in as expected, would suggest that inflation is not currently a problem in the US economy and that the Fed is fine with keeping these low rates in place. Also released on Wednesday are the latest retail sales figures for the month of March, which are expected to be very close to zero, registering growth of only 0.1 percent during the month. Retail sales need to pick up the pace if the US economy is going to continue to move forward in this slow growth environment. On Thursday the Consumer Price Index (CPI) will be released and, much like the PPI earlier in the week, expectations are for a very low rate of inflation being shown during the month of March. If it comes to fruition, it will only add to the thought that the Fed can afford to keep rates low without the fear of runaway inflation running rampant in the economy. Also released on Thursday are the standard weekly unemployment related figures with both figures expected to be little changed over last week’s numbers. These releases should not have a notable impact on the overall markets. On Friday the Empire Manufacturing index is set to be released, with expectation that the index will make it two positive months in a row, indicating that manufacturing in the greater New York area picked up during the month of April. This could be a positive precursor for other manufacturing releases to come later during April. Wrapping up the week this week is the release of the University of Michigan’s Consumer Sentiment index for the month of April (first estimate). Expectations are for little change over the end of March reading of 91, but any wide deviation from the expected 92 reading could see some marginal market reaction. In addition to the scheduled economic news releases this week there are also nine speeches being given by Fed officials and one by Treasury Secretary Jack Lew, which is somewhat unusual. The markets will likely pay casual attention to the speeches by the officials as they are unlikely to have much bearing on the upcoming Fed decisions, decisions that Chair Yellen has outlined very eloquently over the past two weeks.

 

Interesting Fact Amsterdam is built entirely on poles

 

Because Amsterdam’s soil consists of a thick layer of fen and clay, all buildings are built on wooden poles that are fixed in a sandy layer that is 11 meters deep on average. The Royal Palace at Dam Square is built on no less than 13,659 wooden poles. Newer poles are made of concrete and steel.

 

Source: www.visitholland.nl and tedx.amsterdam

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