For a PDF version of the below commentary please click here Weekly Letter 7-27-2015

Commentary at a glance:

-The US markets continued to trade in a wild fashion, last week moving significantly lower.

-Concerns over continued economic growth in China dominated headlines.

-Continued speculation about when Chair Yellen will raise rates moved the fixed income market.

-Earnings season for the second quarter of 2015 is off and running.

-Initial jobless claims last week hit a more than 41 year low!

 

Market Wrap-Up: The rollercoaster ride in the global financial markets continued last week with the bears taking control of the markets and pushing them lower, while the VIX moved off of the lowest point of 2015 as it looks to be attempting to retake the average level we have seen over the past year. The charts below are of the three major US indexes in green with their respective trading ranges drawn by the red lines. The VIX (lower right pane below) is drawn with the index in green and the one year average level of the VIX drawn in red:

4 charts combined 7-27-15

From a technical standpoint, all three of the major US indexes had a pretty rough week last week, but the level of technical difficulty did vary among the three indexes. From a technical standpoint, the NASDAQ (lower left pane above) remains the strongest, thanks in large part to better than expected earnings announcements from a few very over-weighted component companies that have driven the overall performance over the past few weeks. Despite the strong earnings performance of the NASDAQ the index still moved significantly lower last week, falling all of the way back into its most recent trading range. The S&P 500 (upper left pane above) comes in second place in terms of technical strength after last week’s decline. The S&P 500 started last week slightly above its most recent trading range, only to easily blow through that range in just a few trading days at the end of the week last week, ending the week just slightly below the lower bound of its trading range. The Dow (upper right pane above) was the worst performer last week in technical terms, after failing to make it above its most recent trading range and then meaningfully falling below the lower bound of its most recent trading range. The Dow is also now within striking range of falling below its most recent low point reached back in early July. If the Dow breaks down below this point it could be a sign that the index will move significantly lower over the coming days or weeks. One interesting aspect to the market movements last week was the lack of movement out of the VIX (the fear gauge for the overall markets). Yes, the VIX moved higher by nearly 15 percent, but this move is relatively small given the bleak technical picture and the size of the downward moves that occurred on the broad indexes. Typically, when the indexes break down in excess of two percent during a single week, the move in the VIX is much more violent as investors fear that more downside is coming and move toward safety, which is calculated in the VIX. Last week, however, this was not the case as the VIX, while it did move higher, failed to get back to the average level we have seen so far over the past year. This could mean one of two things: either that people are overreacting in pushing the indexes lower and the indexes will come snapping back or that the VIX is incorrect and investors are misjudging the risks that are out there in the markets, artificially keeping the VIX low.

 

Going forward it looks like what is normally a lazy time during the trading season—summer in full swing—will end up being anything but lazy this year. The financial markets around the world are more active than usual with indexes such as the main Chinese index having some of the wildest trading they have seen in more than a decade and the US markets swinging in a fairly wide range. It looks like the calm and complacency that normally takes hold during the summer failed to materialize this year and we moved right into the large swings that are normally seen during the fall when traders return from summer vacations. I fully expect the wild trading to continue for the next few weeks, if not months, as everyone attempts to figure out when interest rates will start to increase in the US and what China is willing to do to prop up its financial markets and economy.

 

International News: International news last week was headlined by the uncertainty in China. The mainland Chinese stock market index has been on a very wild ride during the past month with the index topping out at a 150 percent gain in less than a year, only to fall by more than 30 percent in just a matter of a few trading days. The chart below from Bloomberg shows the Shanghai Stock Exchange Composite index over the past year:

china

As you can clearly see, the run up had been tremendous, but not as tremendous as the unwinding that took place over less than a month. The turmoil is far from over; just today the index declined by 8.48 percent, the largest single day decline since 2007. The reasons for the decline are two-fold: a general slowing down of the economy in China and fears about when the government in China will stop pumping money into the financial system and markets to prop them up. The actions taken by the People’s Bank of China (PBOC) over the past month have been extraordinary and unprecedented in China. Now the government is left trying to figure out how it can extract itself from the financial markets after it did a lot of buying to prop the markets and economy up. The problem is that if China were truly the only buyer for some of the assets that were purchased, it could be stuck with them for an extended period of time. The unwinding of what China did in a split second will take a long period of time and could lead to heightened volatility in its markets, much as we saw today.

 

Add in the uncertainty about the Chinese economy, which last week produced a poor Purchasing Managers Index (PMI) reading of 48.2 (July), down from 49.4 in June, and it is easy to see that China may be headed for some trouble in the economy and financial markets. When the PMI index falls below 50 it means that manufacturing activity slowed down (contracted) during the month. If manufacturing is contracting somewhere like China, it is a major problem because it has effects around the world as China is a very large consumer of raw materials so it can make items that are then exported around the world. Australia in particular is an economy that is heavily dependent on China buying what it is pulling out of the ground with its massive mining industry. In recent years China has been attempting to move its overall economy from an export driven economy to an internal consumption economy. But that push will likely be on hold until China is on more sound financial footing, both in its financial markets and its economy. With China being the second largest economy in the world, whenever there are concerns about its growth rate falling (it is currently expected to be over 7 percent during 2015) or its economy hitting a soft patch, the rest of the world takes notice and typically sees heightened volatility in the global financial markets. While the US financial markets in particular is pretty well insulated from what happens with the Chinese economy, there is some concern that if China gets sick the rest of the world will pick up a cold, and right now the global economy is growing so slowly that picking up even a cold could be dangerous.

 

National News: National news last week focused on two main topics, the first being earnings season as we are now more than 37 percent of the way through earnings announcements for S&P 500 component companies. The second topic of the national news media last week was the upcoming 2016 Presidential election and the mind-blowing numbers Donald Trump has been putting up in some of the recent polls.

 

Last week many well known companies released their second quarter 2015 earnings results and there were more positive releases than negative, as can be seen in the table below as there is much more green than red. Biotechnology, financial and consumer product based companies seemed to produce the best results last week. Below is a table of the better known companies that released earnings last week with earnings that missed expectations highlighted in red, while earnings that beat expectations by more than 10 percent are highlighted in green:

 

3M 2% Eli Lilly 22% SanDisk 175%
Abbott Laboratories 4% Freeport-McMoRan 27% Six Flags Entertainment 8%
Amazon.com 227% General Motors 19% Southwest Airlines 0%
American Airlines 1% GoPro 79% Starbucks 2%
American Express 7% Halliburton 52% Stryker 3%
AmerisourceBergen 4% Hanesbrands pushed Texas Instruments 0%
Apple 3% Harley-Davidson 4% Travelers Companies 19%
AT&T 10% IBM 1% Under Armour 40%
AutoNation -1% Janus Capital -4% Union Pacific 3%
Baker Hughes 0% Kimberly-Clark 4% United Continental 1%
Bank of New York 17% Lexmark 14% United Rentals 7%
Boeing 16% Lockheed Martin 10% United Technologies 6%
Bristol-Myers Squibb 51% Marriott Worldwide 1% Verizon Communications 3%
Cabela’s -7% McDonald’s 2% VF Corp 11%
Caterpillar 2% Microsoft 11% Visa 25%
Chipotle Mexican Grill 1% Morgan Stanley 8% Waste Management 6%
Coca-Cola 5% Newmont Mining 4% Whirlpool 1%
Dow Chemical 12% Raytheon 1% Wolverine World Wide 29%
Dr Pepper Snapple 3% RLI 38% Xerox -4%
Dunkin’ Brands 4% Ruby Tuesday 9% Yahoo! -40%

 

Amazon turned in a stellar quarter and not from the likely business arms. Cloud computing and storage were the strong business segments last quarter for the company, driving a large part of the out performance. The online retail business performed well and remains the life blood of the company. Lockheed Martin turned in a solid quarter and capped off earnings week last week with the announcement that it will be purchasing Sikorsky Helicopter for about $9 billion, adding yet another business segment to the already very large defense contractor. One thing to remember about the above table is that the figures quoted are the amount by which companies either beat or fell short of expectations on an earnings per share basis, not a revenues basis. So while a company may beat expectations, it could still have had a rough quarter with falling sales.

 

According to Factset Research, we have seen 187 (37 percent) of the S&P 500 companies release their results for the second quarter of 2015. Of the 187 that have released, 76 percent have met or beaten earnings estimates, while 24 percent have fallen short of expectations. This percentage of companies beating expectations moved higher by 2 percent over the course of the past week. When looking at the revenues of the companies that have reported, 54 percent of the companies have beaten estimates, while 46 percent have fallen short. This figure slipped by 2 percent over the course of the previous week and is more of a true signal as to how the quarter turned out for corporate America as it is much harder to use financial wizardry on the top line revenue numbers than it is on the bottom line earnings per share figure. In looking at the companies that have given forward guidance for the third quarter of 2015, 20 companies according to Factset have issued negative guidance, while 7 companies have issued positive forward guidance. While we are still a long way from the end of earnings season, it is so far turning out to be slightly better than predicted, but we still have a few key sectors that largely need to report.

 

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

 

Aflac Equity Residential Owens & Minor
Ally Financial Ethan Allen Interiors Panera Bread
Altria Group Exxon Mobil Pfizer
Amgen Facebook Phillips 66
AIM Ford Motor Pitney Bowes
Aptargroup General Dynamics Procter & Gamble
Arrow Electronics Gilead Sciences Public Storage
Arthur J. Gallagher Goodyear Tire & Rubber Standard Pacific
Atmel Hanesbrands Starwood Hotels & Resorts
ADP International Paper Time Warner Cable
Booz Allen Hamilton Iron Mountain T-Mobile
BorgWarner J & J Snack Foods Twitter
Callaway Golf JetBlue Airways United Parcel Service
Chevron Level 3 Communications United States Steel
Colgate-Palmolive LinkedIn Valero Energy
Columbia Sportswear Manitowoc WebMD Health
ConocoPhillips Marriott International Western Union
Crocs MasterCard Whole Foods Market
D.R. Horton Metlife Wynn Resorts Ltd
Electronic Arts Northrop Grumman Xcel Energy

 

Big energy will be a focus of earnings this week as a number of well-known energy companies release their latest results. On the whole their results are expected to be very poor, as the price of oil staying down for such an extended period of time will really start to show up in their numbers. With more than 1,600 companies releasing their earnings this week, this will be the week that either pushes earnings season higher or turns things around and moves it lower, and energy will likely be the biggest culprit behind the move. Three interesting technology companies are also releasing their results, which will be closely followed this week, those being Facebook, Twitter and LinkedIn. Those three companies are very important to the technology sector overall and the NASDAQ will likely trade on their quote on the days they release their results. UPS is a final bellwether that will be closely watched this week by Wall Street as the company touches so many businesses through its shipping that it gets a very good feel for the overall health of small American businesses, which are vitally important to the economy.

 

In addition to the earnings season making headlines last week the Republican Party also made numerous headlines last week as Donald Trump is now the front runner in several key polls taken over the course of the past few weeks. The businessman-turned-politician has been stirring up trouble now for several weeks, including antics like giving out Lindsey Graham’s personal cell phone number at a campaign stop and continually saying things other politicians would never imagine uttering in public. While Trump’s true intentions are still unclear, one thing is clear and that is the people being polled in American about him like him more than almost any other Republican candidate, which says a lot since there are now officially 16 Republican candidates. For the financial markets, it seems it is still far too early for them to be paying much attention to the political races, but they did take notice last week at a comment that Hillary Clinton made at a campaign stop when she said she would like to double the short term capital gains, both in terms of the time an investment needs to be held and in the rate it is taxed for upper income earners. We should know more about the Republican side after next week’s Republican Presidential debate in Cleveland on Thursday, August 6th.

 

Market Statistics: Keeping with the roller coaster theme the US financial markets seem to have been on for the past few months, last week was a down week following the strong upward moves that occurred two weeks ago:

 

Index Change Volume
S&P 500 -2.21% Above Average
NASDAQ -2.33% Above Average
Dow -2.86% Above Average

 

As mentioned above, the primary driving factors to last week’s moves in the US financial markets were uncertainty about the Chinese economy and corporate earnings season. The drastic moves we have been seeing over the past few weeks in the broad markets look set to continue in the near term as there are as few reasons for them to stop as there are for them to continue.

 

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
Medical Devices 0.92% Oil & Gas Exploration -5.91%
Residential Real Estate 0.53% Basic Materials -5.66%
Regional Banks -0.46% Biotechnology -5.03%
Software -0.55% Aerospace & Defense -4.50%
Financials -0.76% Energy -4.32%

Last week there were only two sectors of the market that saw positive performance, with the positive performance in the two sectors largely being driven by earnings announcements. Regional banking and Financials also made it into two of the top five spots last week, also on relatively strong corporate earnings. On the flip side, Oil and Gas once again held the top dog spot as the sector declined by almost six percent over the course of the week. Much of the decline in the sector piggybacked the decline seen in the price of oil, which also fell in excess of five percent last week. Materials also had a difficult week as uncertainty over the future demand out of China led investors to sell commodities out of fear that the Chinese economy may be slowing down more than first thought.

The US fixed income market moved mostly higher last week, especially on the long end of the curve as investors become a little less certain about the timing of future movements of the Fed funds rate:

Fixed Income Change
Long (20+ years) 2.25%
Middle (7-10 years) 0.70%
Short (less than 1 year) -0.01%
TIPS 0.07%

The US dollar moved a little lower last week, giving up 0.66 percent against a basket of international currencies as investors seemed to be favoring currencies, such as the Euro on hopes that the situation in Greece will resolve itself amicably. The Euro was the strongest performing currency last week after gaining 1.20 percent. The weakest performing currency of the major global currencies was the Australian dollar as it gave up 1.23 percent against the value of the US dollar. The decline in the Australian dollar correlated very highly with the decline in commodities as much of the Australian economy is dependent on mining and materials with much of what is mined being sent to China.

Last week commodities all moved lower for the third week in a row:

Metals Change Commodities Change
Gold -3.04% Oil -5.65%
Silver -1.48% Livestock -2.09%
Copper -4.84% Grains -6.56%
Agriculture -4.66%

The overall Goldman Sachs Commodity Index gave up 4.42 percent last week as oil declined 5.65. Last week I mentioned oil being range bound with the lower end of the range being about $47, while the upper end of the trading range is around $61. With the decline seen last week in the price of oil, it is now down almost directly sitting on the lower end of the trading range. If the range holds up, it means we could see a little bit of a rebound in the price of oil over the coming weeks.

The major metals all moved lower last week with Gold giving up 3.04 percent (crossing below $1,100 per ounce), while Silver decreased 1.48 percent and Copper dropped 4.84 percent. Soft commodities also moved lower last week with Livestock falling 2.09 percent, while Grains declined 6.56 percent and Agriculture moved lower by 4.66 percent. The two week combined decline in the price of grains is now larger than 10 percent as the US harvest continues to be questioned due to some wild weather.

The best performing index last week was found in China with the Shanghai base Se Composite Index turning in a gain of 2.90 percent. After looking at how the mainland China indexes performed on Monday (today) it seems China will not be at the top of the list next week as the mainland China index declined in excess of 8 percent during Monday’s trading. The worst performing index of the global financial indexes last week was found in Canada with the Toronto Stock exchange falling 3.10 percent, much like the Australian Dollar the index fell because of the continued slide in global commodity prices.

Much like the equity market performance last week, the VIX saw a significant reversal in direction last week as it gained nearly 15 percent. This upward move came after the VIX hit the lower point we have seen so far during 2015 less than two weeks ago. At the current level of 13.74, the VIX is implying a move of 3.96 percent over the course of the next 30 days. As always, the direction of the move is unknown.

For the trading week ending on 7/24/2015, returns in my hypothetical models* (net of a 1% annual management fee) were as follows:

  Last Week Since 6/30/2015
Aggressive Model -1.29 % 1.49 %
Aggressive Benchmark -1.91 % -0.03 %
Growth Model -0.81 % 1.16 %
Growth Benchmark -1.48  % -0.02  %
Moderate Model -0.31 % 0.86 %
Moderate Benchmark -1.07 % -0.01 %
Income Model 0.00 % 0.77 %
Income Benchmark -0.53 % 0.00 %

*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.

 

I made no changes to my models over the course of the previous week. I remain in a cash heavy and partially hedged position across all of my models, expecting the market volatility to continue. I continue to look for opportunities in the investment universe, with the currently most attractive area of the market for finding value being oil and gas, but as you have seen over the past few weeks that area of the market is currently so volatile that it is not worth taking a first step. Overall, the baskets of stocks I own have been performing as expected given the market volatility with the overall volatility that I have seen in the baskets being less than the S&P 500, as measured by both maximum drawdown and standard deviation, while the returns have easily beaten the S&P 500.

 

Economic News:  Last week was one of the slowest weeks we have seen in a while for economic news releases as there were only four releases. There were no economic news releases which significantly beat or missed market expectations:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Neutral 7/22/2015 Existing Home Sales June 2015 5.49M 5.40M
Slightly Positive 7/23/2015 Initial Claims Previous Week 255K 278K
Neutral 7/23/2015 Continuing Claims Previous Week 2207K 2218K
Slightly Negative 7/24/2015 New Home Sales June 2015 482K 550K

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

Last week’s economic news releases started out on Wednesday with the release of the existing home sales figure for the month of June, which came in very close to market expectations, signaling that the US housing market is on pretty solid footing. On Thursday the standard weekly unemployment related figures for the previous week were released with both figures coming in better than expected. Initial jobless claims were so low that the reading of 255,000 was the lowest level the US has seen on the release since November of 1973. Wrapping up the week last week on Friday was the release of the New Home sales figure for the month of June, which came in at 482,000 homes sold. This figure was slightly below market expectations, but that did not stop the US home builders from having a strong week of performance for their stocks.

 

This week is more of a normal week for economic news releases in terms of the number of releases and there are a few that could impact the overall market movements. The releases highlighted in green below have the ability to impact the overall markets on the day they are released:

 

Date Release Release Range Market Expectation
7/27/2015 Durable Orders June 2015 3.00%
7/27/2015 Durable Goods -ex transportation June 2015 0.50%
7/28/2015 Case-Shiller 20-city Index May 2015 5.60%
7/28/2015 Consumer Confidence July 2015 100
7/29/2015 Pending Home Sales June 2015 1.00%
7/29/2015 FOMC Rate Decision July 2015 0.25%
7/30/2015 Initial Claims Previous Week 271K
7/30/2015 Continuing Claims Previous Week 2200K
7/30/2015 GDP-Adv. Q2 2015 2.60%
7/31/2015 Chicago PMI July 2015 50.5
7/31/2015 University of Michigan Consumer Sentiment July 2015 94

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

 

This week starts on Monday with the release of the June durable goods orders figures (both including and excluding transportation), which are expected to show gains during the month. The less volatile of the orders number is the number that excludes transportation and it is expected to show a gain of 0.5 percent during the month. The market will likely react negatively if either of these figures comes in below zero as big ticket items are a large part of the overall US economy. On Tuesday the Case-Shiller 20 City Home Price index for the month of May is set to be released with expectations of a year-over-year gain of 5.6 percent. However, the markets will likely not react to this release no matter what is released since the data is very stale. Later during the day on Tuesday the Consumer Confidence index for the month of July is set to be released with expectations of a reading of 100.0 going to print. This would be a slight decline from the 101.4 that printed for June, but would still represent high confidence on the part of the US consumer. On Wednesday the main release will be the FOMC interest rate decision.

Fed watch 7-27-15While it is highly unlikely that the Fed will raise interest rates at this meeting, it is technically possible. The latest Fed watch figures about when the Fed will raise rates are to the right. While the market is expecting a zero percent chance of a rate hike, stranger things have happened in the past with the Fed, so it is anyone’s guess. On Thursday the standard weekly unemployment related figures for the previous week are set to be released with expectations that initial jobless claims will move off of their lowest level in more than 40 years and move up by about 20,000. Continuing jobless claims, however, are expected to continue to decline. The unemployment figures are likely to be overshadowed on Thursday by the government’s release of its first estimate of GDP for the second quarter of 2015. While expectations are for a reading of 2.6 percent, anything from -1 to 4 percent is possible. After such a dismal first quarter GDP figure anything above zero will be a welcome relief for the markets. On Friday the Chicago Area PMI is set to be released with expectations of a reading dangerously close to 50 at 50.5. A reading under 50 would signal a manufacturing contraction, while a reading over 50 signals an expansion. The markets will likely largely ignore this release as the overall US PMI is more important than any single region as we have seen in the past. Wrapping up the week on Friday is the release of the University of Michigan’s Consumer Sentiment Index for the month of July (final estimate), but expectations are for little change from the middle of the month estimate so it is unlikely that this release will have any impact at all on the markets.

 

Fun fact of the week— China’s Urban Billion
By 2030 China’s cities will have added 350 million people—more than the entire population of the United States today.

Source: Mckinsey, “Preparing for China’s urban billion”

For a PDF version of the below commentary please click here Weekly Letter 7-20-2015

Commentary at a glance:

-The US markets moved higher on earnings and Greece.

-Greece passed the required laws for the bailout program to move forward.

-Fed Chair Yellen still wants to move interest rates during 2015.

-Earnings season for the second quarter of 2015 is off and running.

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

 

Market Wrap-Up: The rollercoaster ride in the global financial markets continued last week with the bulls taking control of the markets and pushing them higher, while the VIX fell apart, collapsing to the lowest point we have seen so far during 2015. The charts below are of the three major US indexes in green with their respective trading ranges drawn by the red lines. The VIX (lower right pane below) is drawn with the index in green and the one year average level of the VIX drawn in red:

4 charts combined 7-20-15

After closing below their respective trading ranges two weeks ago, the three major US indexes moved upward last week at the fastest pace we have seen in several months, with the NASDAQ in particular getting a healthy boost from earnings season announcements from the likes of Google and Netflix. The increase on Friday of 0.9 percent on the NASDAQ can be fully attributed to the move in Google, which released results Thursday after the market close and gained more than 16 percent on Friday. The 16 percent gain on Google led to a gain of 1.08 percent in the overall NASDAQ. Without Google, on Friday the NASDAQ would have turned in a small loss for the day. From a technical standpoint, the NASDAQ is the strongest of the three major indexes, having easily moved up through the lower bound of its trading range and breaking through the upper bound as well, all in the course of three days. The S&P 500 also made it up into and fully through its trading range, ending the week slightly above the upper bound of its trading range, but did so with much less enthusiasm than the NASDAQ. The Dow was the laggard of the three major indexes, moving high for the week and easily moving into its trading range, but failing to actually break out to the upside. Meanwhile, the VIX moved much lower, giving up all of the gains that had occurred over the past two weeks over the course of just a few days. The VIX closed the week under 12, making it the lowest closing point that we have seen on the VIX so far during 2015.

 

International News: International news last week focused on a few topics that had noticeable impacts on the global financial markets, the first of which was the resolution of the situation in Greece. After the meeting of the EU two weeks ago at which the EU decided to offer Greece a third bailout in the past five years with many strings and conditions attached, Greece followed through and passed the required laws for the negotiations to move forward about the new deal. Taxes were increased, the retirement age was increased and pension payments will all be lowered over the coming years thanks to the newly passed laws. The people in Greece are not happy about the new laws, but after some initial fears of rioting in the streets after the vote, the Greek people largely appear to see this bailout as necessary and the terms and conditions as unfair, but acceptable. With the bailout having been approved in several other key countries such as Germany, the European Central Bank (ECB) raised the emergency cash funding to Greece late last week, allowing for the Greek banks to open their doors (after being closed to the past three weeks) earlier today in Greece. Limits on the amount one can withdraw (capital controls) remain in place, but even these are expected to be eased over the coming days and weeks. While it is likely the bailout funds that will potentially be dispersed from the rest of Europe to Greece will buy Greece some more time, it is also highly likely that Greece will need yet another bailout over the coming years as the structural changes that need to take place in Greece to become more competitive on the global scale remain elusive and the country’s economy continues to plummet. It is hard to imagine that spending in Greece did anything other than fall off a cliff over the last three weeks as the capital controls made it very difficult for consumers to pull money out of banks. This time period could not have been positive for the overall health of the Greek economy. We are clearly not out of the woods yet with Greece, but at least it appears the Greeks can now at least see the path that leads them out of the woods. However, it is still up to Greece as to whether it will walk along the path or if the country will continue blazing its own trail through the uncharted woods.

 

Iran was another focal point of the international news last week. Its impact was seen in the financial markets as energy companies moved notably lower, thanks to a continuing slide in the price of oil. The nuclear deal with Iran has been inked with both sides calling the deal a monumental moment, but also with both sides taking a good deal of criticism from within their own countries for making the deal. While it will be several years before we see if the deal will actually work the way it is expected to work, the immediate impact of the deal is on Iranian oil coming onto the open market. Currently there is far more supply of oil than there is demand on the global scale and this is one of the key driving forces behind the falling price of oil that we have seen over the past several months. According to the latest IEA data we are seeing an oversupply of oil of about 3 million barrels per day.  While the US rig count has been cut by more than half in just the past year, according to the latest Baker Hughes rig count data, the supply of oil around the world has continued to increase; with this increase the price has fallen. Currently expectations around the world are for prices to move lower when the sanctions against Iranian oil are lifted, which could come very soon, with the US Congress voting on the deal later this week. While there is some speculation about how fast the Iranian oil will make it to the market, the fact remains that there will be about a million barrels of oil per day more flowing onto the market than when the sanctions against Iran were in place and they were having a hard time moving oil to market.

 

National News: National news last week focused primarily on earnings season as the second quarter 2015 earnings season got fully under way. The secondary focus of last week’s national news was Chair Yellen’s testimony on Capitol Hill.

 

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

 

AMD -12% General Electric 0% Las Vegas Sands pushed
Autoliv 5% Goldman Sachs 28% Mattel 120%
Bank of America 25% Google -10% Netflix 20%
BlackRock 3% Honeywell 1% Philip Morris 8%
Charles Schwab 4% Intel 10% Seagate Technology pushed
Citigroup 7% J B Hunt Transport -2% Sherwin-Williams -1%
CSX 6% Johnson & Johnson 1% U.S. Bancorp 1%
Domino’s Pizza 1% JPMorgan Chase 7% UnitedHealth 4%
eBay 9% KeyCorp -4% Wells Fargo -1%
Fastenal 2% Kinder Morgan -21% Yum! Brands 10%

 

Last week was an interesting week for earnings releases as there were some very mixed results within some key sectors of the US economy. Financials seemed to be the big winner among the sectors last week with Bank of America and Goldman Sachs both beating earnings by more than 20 percent, while JP Morgan also turned in solid results. Technology was very mixed as companies like Google and AMD both missed estimates, while Netflix and Intel both beat expectations. Netflix soared to a record high last week after it reported better than expected earnings as well as 3.3 million new customers during the month, giving them a total of more than 65 million customers at the end of second quarter 2015.

 

According to Factset Research, we have seen 61 (12 percent) of the S&P 500 companies release their results for the second quarter of 2015. Of the 61 that have released, 72 percent of them have met or beaten earnings estimates, while 28 percent have fallen short of expectations. This percentage of companies beating expectations is one percentage point higher than it was at the end of the first quarter 2015. When looking at revenue of the companies that have reported, 56 percent of the companies have beaten estimates, while 44 percent have fallen short. This 56 percent figure is more than 10 percentage points higher than it was during the first quarter of 2015 and represents a very good start to earnings season. When looking at the historical data the percentage of companies that have beaten revenue estimates is 58 percent over the last five years, so this quarter’s 56 percent is only slightly below the five year average. In looking at the companies that have given forward guidance for the second quarter of 2015, 7 companies according to Factset have issued negative guidance, while only 1 company has issued positive forward guidance for the next quarter. We are still very early in the earnings season for the second quarter 2015 and the numbers are still likely change, but so far this season is not bad and the fears over Energy dragging everything down and making second quarter 2015 a horrible quarter seem unfounded.

 

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

 

3M Eli Lilly SanDisk
Abbott Laboratories Freeport-McMoRan Six Flags Entertainment
Amazon.com General Motors Southwest Airlines
American Airlines GoPro Starbucks
American Express Halliburton Stryker
AmerisourceBergen Hanesbrands Texas Instruments
Apple Harley-Davidson Travelers Companies
AT&T IBM Under Armour
AutoNation Janus Capital Union Pacific
Baker Hughes Kimberly-Clark United Continental
Bank of New York Lexmark United Rentals
Boeing Lockheed Martin United Technologies
Bristol-Myers Squibb Marriott Worldwide Verizon Communications
Cabela’s McDonald’s VF Corp
Caterpillar Microsoft Visa
Chipotle Mexican Grill Morgan Stanley Waste Management
Coca-Cola Newmont Mining Whirlpool
Dow Chemical Raytheon Wolverine World Wide
Dr Pepper Snapple RLI Xerox
Dunkin’ Brands Ruby Tuesday Yahoo!

 

This week the focus of earnings season will be on consumer spending more so than large industrials. The credit card processing companies, mainly Visa and American Express, will be very closely watched as they have the best data regarding the number and value of customer transactions that took place during the quarter. Apple and Amazon, however, will likely overshadow the credit card companies as the two technology giants almost always push the markets when they announce their earnings. On a more basic spending level, Kimberly-Clark and Starbucks should provide a small glimpse into average consumer spending as many Americans spend money on products from both companies. Caterpillar will be closely watched this quarter as the mining as well as the oil and gas industries have been struggling under lower commodity prices and these two sectors represent a large portion of Cat’s business.

 

On Wednesday last week Federal Reserve Chair Janet Yellen started her two days of testimony before Congress, which is at times almost comical and at other times very scary that these people in Congress actually get elected one way or another here in the US. Perhaps the funniest part of either session was when California Democrat Brad Sherman said the Fed should wait until spring to raise interest rates, taking a “page from mother nature” as Spring is a time when plants send shoots rising out of the ground.  I for one completely missed how mother nature knows best about when interest rates should rise, but the look on chair Yellen’s face when he made the comment was priceless. On a more serious note, Chair Yellen’s testimony made it very clear that the Fed is ready and wanting to increase interest rates this year, provided the data supports it. According to the latest Fed watch data from the CBOE, the odds of a rate hike at the September meeting fell slightly last week, but the odds on either an October or a December rate hike both increased. So while the prospects of a double rate hike during the end of 2015 seem to be diminishing, it is clear that many market participants are expecting a rate hike during the fourth quarter of 2015.

Fed watch 7-20-15

Market Statistics: The three major US indexes ended the week higher last week, thanks to positive earnings from a few key companies on each of the indexes and a resolution on Greece:

 

Index Change Volume
NASDAQ 4.25% Average
S&P 500 2.41% Average
Dow 1.84% Average

 

As mentioned above, the NASDAQ turned in a stellar week thanks to the earnings announcements by Netflix and Google. With the way the NASDAQ is currently weighted, Google alone last week accounted for more than 1.7 percent of the total increase of the index as the stock was up more than 25 percent over the course 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
Biotechnology 6.65% Commodities -2.65%
Technology 5.22% Oil & Gas Exploration -1.95%
Financial Services 3.44% Energy -1.43%
Pharmaceuticals 2.93% Home Construction -1.36%
Financials 2.66% Basic Materials -0.61%

With NASDAQ rallying so much last week it was not surprising to see that the top performing sectors of the overall markets are NASDAQ heavy, with biotechnology and overall technology leading the way higher. The other sector that had a good week was the financial sector as earnings announcements helped boost the overall sector. On the flip side, commodities and energy continue to struggle greatly; as concerns over Iranian oil coming onto the market once again pushed oil prices lower.

The US fixed income market moved last week primarily on the long end of the curve after Fed Chair Yellen’s testimony:

Fixed Income Change
Long (20+ years) 2.30%
Middle (7-10 years) 0.40%
Short (less than 1 year) 0.01%
TIPS 0.18%

Despite the deal for Greece looking like it will be completed with a new round of bailout funds, the US dollar rallied against almost all of the global currencies, gaining 2.07 percent against a basket of international currencies. The British Pound was the strongest of the major global currencies last week, as the decision years ago to not join the common currency is starting to look even better than it did at the time; the pound gained 0.72 percent against the value of the US dollar. The weakest performing currency of the major global currencies was the Euro as it gave up 2.69 percent against the value of the US dollar. This decline comes on the heels of Greece passing the laws that were needed to qualify for bailout funds, in addition to other European countries ratifying the bailout program.

Last week commodities all moved lower for the second week in a row:

Metals Change Commodities Change
Gold -2.55% Oil -3.85%
Silver -4.37% Livestock -0.11%
Copper -1.79% Grains -3.44%
Agriculture -1.34%

The overall Goldman Sachs Commodity Index gave up 2.65 percent last week as oil declined 3.85 percent over the talks between Iran and the US coming to a conclusion with a deal being made. Oil remains range bound ($50.18) with the lower end of the range at about $47, while the upper end of the trading range is about $61.

The major metals all moved lower last week with Gold giving up 2.55 percent, while Silver decreased 4.37 percent and Copper dropped 1.79 percent. Soft commodities also moved lower last week with Livestock falling 0.11 percent, while Grains declined 3.44 percent. Agriculture moved lower by 1.34 percent.

China was not the top or bottom performing index of the major global indexes for the first time in several weeks last week. The best performing index last week was found in France with the CAC-40 turning in a gain of 4.50 percent. The worst performing index of the global financial indexes last week was found in Malaysia with the KLC Index gaining only 0.6 percent over the course of the week.

The significant move I was waiting for last week on the VIX appears to have been delayed slightly as the VIX declined by 29 percent over the course of the previous week. The VIX moved significantly lower on the days in which the situation in Greece looked less bleak, as it appeared to be trading almost in lock step with the situation in Europe. At the current level of 11.95, the VIX is implying a move of 3.44 percent over the course of the next 30 days. As always, the direction of the move is unknown.

For the trading week ending on 7/17/2015, returns in my hypothetical models* (net of a 1% annual management fee) were as follows:

  Last Week Since 6/30/2015
Aggressive Model 1.27 % 2.78 %
Aggressive Benchmark 1.83 % 1.79 %
Growth Model 0.89 % 2.08 %
Growth Benchmark 1.42  % 1.40  %
Moderate Model 0.50 % 1.36 %
Moderate Benchmark 1.02 % 1.01 %
Income Model 0.23 % 1.01 %
Income Benchmark 0.51 % 0.51 %

*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.

 

I made no changes to my models over the course of the previous week.

 

Economic News:  Last week was a very busy week for economic news releases as there were numerous releases, but no single focus of the releases. There were two releases that missed expectations by a significant amount released last week (in red) and no releases that significantly beat market expectations:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Negative 7/14/2015 Retail Sales June 2015 -0.30% 0.30%
Negative 7/14/2015 Retail Sales ex-auto June 2015 -0.10% 0.50%
Neutral 7/15/2015 PPI June 2015 0.40% 0.30%
Neutral 7/15/2015 Core PPI June 2015 0.30% 0.10%
Neutral 7/15/2015 Empire Manufacturing July 2015 3.9 3.5
Neutral 7/15/2015 Industrial Production June 2015 0.30% 0.20%
Neutral 7/16/2015 Continuing Claims Previous Week 2215K 2285K
Neutral 7/16/2015 Initial Claims Previous Week 281K 283K
Slightly Negative 7/16/2015 Philadelphia Fed July 2015 5.7 12.5
Neutral 7/16/2015 NAHB Housing Market Index July 2015 60 59
Neutral 7/17/2015 CPI June 2015 0.30% 0.30%
Neutral 7/17/2015 Core CPI June 2015 0.20% 0.20%
Neutral 7/17/2015 Housing Starts June 2015 1174K 1123K
Neutral 7/17/2015 Building Permits June 2015 1343K 1150K
Slightly Negative 7/17/2015 University of Michigan Consumer Sentiment July 2015 93.3 96.5

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

 

Last week started out on Tuesday with the release of the retail sales figures for the month of June, which were disappointing to say the least. Overall retail sales were shown to have declined by 0.3 percent, while the market had been expecting an increase of 0.3 percent. Some of this decline was due to the transportation sector, which can move one way or the other very quickly and is difficult to predict. However, even while the volatile transportation sector is taken out retail sales still slipped by 0.1 percent during the month, while the market had been expecting an increase of 0.5 percent. These two figures show a bit of weakness in an area of the economy where we currently cannot withstand much weakness. If consumer spending slows down even more over the coming months it seems the Fed may be forced to push increasing interest rates out until early next year. On Wednesday the Producer Price Index (PPI) for the month of June was released. With both overall PPI and core PPI coming in very close to market expectations the markets failed to take notice. Also released on Wednesday was the Empire manufacturing Index for the month of July (end of June data), which showed that manufacturing in the greater New York area picked up during the month, but did so at a slow pace. On Thursday the standard weekly unemployment related figures for the previous week were released with both numbers coming in just below expectations. Also released on Thursday was the latest Philly Fed Index figure, which disappointed the markets as it posted a reading of 5.7, which is expansionary, but well below the expectations of 12.5. On Friday the Consumer Price Index (CPI) for the month of June was released with both overall prices as well as core prices coming in at market expectations and having no impact on the overall markets. There were also two US housing related figures released on Friday, both the building permits and housing starts figures, with both figures coming in slightly above market expectations and providing a bit of a boost for the companies in the home construction sector. Wrapping up the week on Friday was the release of the University of Michigan’s Consumer Sentiment Index for the month of July (second estimate), which saw sentiment decline by 3.2 points, down to 93.3 from the first estimate of 96.5. This data point combined with a slowdown in spending is concerning because if the US consumer slows down spending further or becomes less confident in the US economy it could spell trouble ahead for the global financial markets.

 

After such a busy week last week it is nice to see only four economic news releases this week, none of which should have a noticeable impact on the overall direction of the financial markets in the US:

 

Date Release Release Range Market Expectation
7/22/2015 Existing Home Sales June 2015 5.40M
7/23/2015 Initial Claims Previous Week 278K
7/23/2015 Continuing Claims Previous Week 2218K
7/24/2015 New Home Sales June 2015 550K

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

 

This week starts out on Wednesday with the release of the existing home sales data for the month of June, which if it is anything like the housing related figures released last week should slightly beat market expectations, coming in just over 5.5 million units. On Thursday the standard weekly unemployment related releases for the previous week are set to be released with continuing jobless claims expected to be slightly higher than last week’s figure, while initial jobless claims are expected to be slightly lower. This week wraps up on Friday with the release of new home sales for the month of June, which is expected to show 550,000 units. If this number comes out in the release it would be a positive sign for the US housing market, but it seems unlikely that new home sales for the month of June will significantly beat market expectations.

 

Fun fact of the week— Google goats!

 

Google HQ rents goats from California Grazing to mow their lawns and fields. The employees think that it’s a lot cuter to watch goats do the mowing than lawn mowers.

 

Source: Dan Hoffman, Director Real Estate and Workplace Services

For a PDF version of the below commentary please click here Weekly Letter 7-13-2015

Commentary at a glance:

-The US markets were mixed last week as a deal in Greece seemed near going into the weekend.

-A deal for bailing out Greece was struck over the weekend by the EU, but Greece still has to vote.

-Fed Chair Yellen still wants to move interest rates during 2015.

-Puerto Rico looks like it could be the next fixed income problem spot.

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

 

Market Wrap-Up: The wild ride in the global financial markets last week was due to the uncertainty over a bailout deal for Greece from the EU. While a deal was struck over the weekend there are still several key votes that need to take place during the first half of this week to solidify Greece’s receipt of any funds from the latest deal. The charts below are of the three major US indexes in green with their respective trading ranges drawn by the red lines. The VIX (lower right pane below) is drawn with the index in green and the one year average level of the VIX drawn in red:

4 charts combined 7-13-15

As you can see in the above charts, all three of the major US indexes broke below their respective trading ranges two weeks ago and, during a very volatile trading week last week, failed to make it back into those trading ranges. From a purely technical standpoint, all three of the indexes are tied in weakness and a potentially new trading range appears to be forming as two of the three major indexes tested what used to be the lower bound of the old trading range during the past two weeks. While the major US indexes were bouncing around last week, so too was the VIX, which saw some very large intra-day and daily moves before settling down at the end of the week very close to where it started. All of the recent movement in the markets appears to just be “noise” as speculators attempt to guess the outcomes of a wide range of possibilities in Greece. Attempting to guess what governments will do in Greece’s situation is a very hard task, but trying to then guess how the financial markets will react seems all but impossible. Uncertainty abounds right now and we are well into the summer trading season, which means the market is susceptible to rumors and hopes pushing it around, something that seems to be happening in earnest lately. Going forward we are likely to see continued choppiness in the markets because the markets seem to be latching on more so than ever to negative news. If it is not Greece then China or Puerto Rico will move into the spotlight and cause continued uncertainty.

 

International News: We have a deal! (But it still needs to be voted on in several countries!) After talks that lasted all night in Brussels over the weekend a deal emerged for Greece that would release many billions of Euros in bailout funds to the country, provided Greece implements all of the strings the EU is demanding. Some of the strings attached to the nearly 90 billion euro bailout deal include increased cuts on pension, a higher VAT tax, a 50 billion euro privatization fund and automatic cuts to things like spending if certain financial goals are not met. In total, the seven page document presents a picture that is far bleaker for Greece than the proposal voted down by the referendum just two short weeks ago. The deal also flies in the face of what Prime Minister Tsipras campaigned on just 6 short months ago when he and his party won the election in Greece on an anti-austerity-and-humiliation-of-Greece platform. This latest deal is certainly not what the people voting for Syriza had in mind. Now that the deal has been struck, the hard part begins; there are various aspects to the deal that have to be put into law in Greece, meaning that Parliament has to vote and approve the measures. While there is a coalition government that in theory has enough votes to pass the new requirements, there appears to be somewhat of a mutiny within the Syriza party, with some members calling for Tsipras to resign from his position and stating that they will never vote for a deal that humiliates Greece or the Greek people. The Greek Parliament has until Wednesday of this week (7/15/15) to pass several pieces of legislation and it is unknown if this will be done. One thing that is clear out of all of this: this deal is the last deal the EU will be attempting to make over the current situation. The EU would rather see Greece leave the Euro voluntarily than continue with the nonsense that has been going on for the past six months. Hopefully Greece will pass the required laws and we can put this whole situation behind us for a few more years. This is the third bailout of Greece in the past 5 years and probably not the last if the country remains in the EU. With the situation in Greece largely completed it looks like the global financial markets’ attention is heading to the east, with China likely taking much of the global spotlight.

 

The Chinese financial markets and everything tied into them have been trading wildly over the past few weeks, seeing some of the largest declines and advances of the past 10 years. All of this is due to institutional and individual investors trying to take advantage of laws that make speculating about the financial markets very easy. Leverage is one of the leading factors that has led to this volatility, as investors could leverage the amount of money they had in the financial markets several times in order to buy more than they otherwise would have been able to. This type of scenario works very well in a market that is moving higher, but comes apart very quickly when the market moves lower. It comes apart even faster when the government arbitrarily lowers the amount of leverage that is allowed and forces people to sell positions. This is essentially the financial experiment China has been undertaking for the past few weeks as the country attempts to slow the Chinese stock market from speeding along by pulling the emergency brake and seeing what happens next, then quickly trying to adjust the break to keep everything moving forward. It will be very interesting to watch how a command and control government like China deals with what was supposed to be an attempt at a capitalistic economy. So far China is learning and investors around the world are watching in amazement as trillions of dollars in gains are made and lost in very short periods of time.

 

National News: National news last week focused on two main topics, the first being Fed Chair Yellen’s speech, which she gave on Friday in Cleveland about the future of monetary policy, and the second being the darkening clouds that Puerto Rico seems to be generating. Any time Fed chair Yellen speaks the global financial markets take notice, and Friday was no different. The main take away from the speech was that she still seems adamantly set to increase interest rates at some point during 2015. She laid out the possibility of a rate hike by citing many different aspects of the economy that she looks at and how the majority of them are pointing toward an economy that is strong enough to withstand a small rate increase. While she was speaking, it was very interesting to watch the CME Fed Watch numbers as far as the percentage probability of a rate hike during any of the remaining meetings in 2015. The latest figures are listed in the table below:

 

Date of Fed Meeting Current Last Week
July 29 2015 0% 0%
September 17 2015 18% 14%
October 28 2015 33% 29%
December 16 2015 55% 51%
January 27 2016 68% 66%

 

As you can see, the probability of a rate hike occurring went up across the board between this time last week and now. But as Chair Yellen mentioned, the Fed remains fully data dependent and will only act if the data shows that it is prudent. When asked about the IMF calling for the Fed to hold off she very cleverly said that the US Federal Reserve acts in its own interests, but takes into account many potential outcomes of its taking action. In total, there was a lot of “fed speak” throughout the speech and Q&A, something she is perfecting very well. “Fed speak,” for those of you who may have not heard that term before, is a term coined for Fed chairman Alan Greenspan’s ability to say a whole lot of words about a topic, but in aggregate say almost nothing or something that was completely incoherent about the topic. It is a way of providing what seems like information, while at the same time sending mixed signals so that the Fed maintains wiggle room should it need to shift policy and keep everyone guessing about what the Fed will do next.

 

There is very little guessing as to what Puerto Rico will do next as the governor is making it sound like the country is very much in trouble with the current debt load it’s been carrying. At the end of June Governor Alejandro Garcia Padilla announced that the island could not pay back the nearly $72 billion in bonds it had issued under a wide variety of different types of bonds. He is calling for a massive debt restructuring that would leave many US based mutual funds and hedge funds holding the bag, in addition to a postponement of debt repayments for several years. These troubles are not new; they just seem to be coming to light a little faster than most investors had wanted. The island has a large population issue; according to US census data, the population has shrunk by 7 percent over the past 10 years and it will likely continue to shrink over the next 10 years. The economy in Puerto Rico is also contracting and that is according to the country’s own economists. Combine the two and it is pretty easy to see how revenues for many of the muni bond offerings have been and will continue to go down. Many of the bonds were already in a high risk category, but many bond managers here in the US used the outsized interest rates combined with the double tax exempt status of the bonds to help boost their mutual funds figures. At this point it looks like that strategy of the past could be in for some outsized volatility in the near future.

 

Market Statistics: The three major US indexes ended the week mixed last week in what turned out to be a wild ride globally as China was adjusting its investment policies and the situation in Greece was rapidly drawing to a conclusion:

 

Index Change Volume
Dow 0.17% Average
S&P 500 -0.01% Average
NASDAQ -0.23% Average

 

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

 

Top 5 Sectors Change Bottom 5 Sectors Change
Residential Real Estate 2.55% Semiconductors -4.37%
Consumer Staples 2.10% Basic Materials -2.15%
Pharmaceuticals 1.82% Oil & Gas Exploration -2.11%
Utilities 1.65% Energy -1.84%
Consumer Service 1.58% Telecommunications -1.68%

Residential Real Estate made it two weeks in a row at the top of the positive performance list last week after gaining a little more than 2.5 percent. Aside from real estate, the other positive performing sectors of the markets seemed to focus on the least risky assets, areas such as Consumer Staples and Utilities. On the flip side, Semiconductors was hit hard once again as we have now seen several key semiconductor companies fall by more than 20 percent in single trading days, thanks in large part to slowing demand for some of the legacy business lines. Energy as well as Oil and Gas Exploration also declined last week as the price of a barrel of oil declined around the world.

The US fixed income market hardly budged last week as investors seemed to be taking a much needed wait-and-see approach to the uncertainty that permeated out of the situation in Greece:

Fixed Income Change
Long (20+ years) 0.04%
Middle (7-10 years) -0.03%
Short (less than 1 year) 0.00%
TIPS -0.28%

With the hopes of a deal over Greece the US dollar saw a little bit of a move lower last week, giving up 0.28 percent against a basket of international currencies. Much of the decline in the dollar took place on Friday as it looked like a deal was near going into the weekend EU meetings, which were described in more detail above. The Euro was the strongest of the major global currencies last week on the hopes of the Greek bailout. The weakest performing currency of the major global currencies was the Australian Dollar, as it gave up 2.4 percent against the value of the US dollar. The continued downward movement of commodities seemed to be the driving force behind the fall in the Australian dollar as much of the Australian economy is based on commodity exports.

Last week commodities all moved lower, with Grains even turning in a slightly lower week, breaking the streak of two weeks in a row with large gains:

Metals Change Commodities Change
Gold -0.24% Oil -6.66%
Silver -0.47% Livestock -3.41%
Copper -1.14% Grains -0.03%
Agriculture -0.86%

The overall Goldman Sachs Commodity Index gave up 3.66 percent last week as Oil dove 6.66 percent over the continuing extension of the talks between Iran and the US. Much of the decline was seen on Monday after the long holiday weekend in the US as many traders seemingly wanted to adjust their commodity positions. Oil remains range bound, but did move to approximately the half way point of its trading range with the decline seen last week. Currently, the lower end of the range is about $47, while the upper end of the trading range is about $61.

The major metals all moved lower last week with Gold giving up 0.24 percent, while Silver decreased 0.47 percent and Copper dropped 1.14 percent. Soft commodities also moved lower last week with Livestock falling 3.41 percent, while Grains declined 0.03 percent. Agriculture moved lower by 0.86 percent as the weather in the mid-west improved slightly over the course of the previous week; there was not a significant amount of rain that fell over the area as there had been so many weeks in a row prior.

After being the worst performing index three weeks in a row heading into last week it was not surprising to see that China turned itself around and was the top performing index last week, gaining 5.20 percent. After what turned out to be a very volatile week in China for their financial markets, it looks like some of the actions the government took to step in and stop the decline have taken hold, at least for the time being, and confidence albeit shaken is starting to return. Taiwan saw the weakest performance of the major global indexes last week as the Taiex Index declined by 4.7 percent. Some of this movement could have been due to uncertainty surrounding the situation in China.

After gaining almost 20 percent the week prior I was expecting the VIX to move a significant amount again last week, but that was not the case. In total, the VIX advanced by 0.24 percent last week in a week that saw the VIX spike over 20, but ultimately fade significantly on Friday. At the current level of 16.83, the VIX is implying a move of 4.86 percent over the course of the next 30 days. As always, the direction of the move is unknown.

For the trading week ending on 7/10/2015, returns in my hypothetical models* (net of a 1% annual management fee) were as follows:

  Last Week Since 6/30/2015
Aggressive Model 0.82 % 1.49 %
Aggressive Benchmark -0.56 % -0.03 %
Growth Model 0.66 % 1.16 %
Growth Benchmark -0.43  % -0.02  %
Moderate Model 0.48 % 0.86 %
Moderate Benchmark -0.30 % -0.01 %
Income Model 0.45 % 0.77 %
Income Benchmark -0.15 % 0.00 %

*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.

 

I made one change in my models over the course of the previous week and that was to sell my position in Rydex Electronics Fund ticker (RYSIX). I sold this because there was a wide divergence from the past performance and how the fund was behaving currently. Typically RYSIX trades with the broad electronics market, both semiconductors as well as other hardware and device makers. However, recently the fund started to trade solely like the semiconductors sector of the markets. With the struggles the semiconductor market has been having recently and the market’s prospects for the future I decided to sell the position and reevaluate the sector with the new and evolving information coming in about the future of the industry.

 

Economic News:  Last week there was no real focus to the economic news releases as it was a very slow week with just the bare minimum of releases being released. There were no releases that missed or beat market expectations by a significant amount last week:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Neutral 7/6/2015 ISM Services June 2015 56.0 56.3
Neutral 7/7/2015 Consumer Credit May 2015 $16.1B $18.2B
Neutral 7/8/2015 FOMC Minutes June Meeting
Neutral 7/9/2015 Initial Claims Previous Meeting 297K 276K
Neutral 7/9/2015 Continuing Claims Previous Meeting 2334K 2230K

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

 

Last week started out on Monday with the release of the ISM Services index for the month of June, which came in very close to market expectations, signaling slow but steady growth in the services sector. On Tuesday consumer credit was shown to have increased during the month of May, but it did so at a slower pace than was expected by the markets. On Wednesday the meeting minutes from the latest Fed meeting were released, but as expected the release held little new information and was largely ignored by the market. As mentioned above, when Yellen spoke on Friday in Cleveland the markets took notice and reacted accordingly. On Thursday the standard weekly unemployment related figures from the previous week were released with both figures coming in slightly above market expectations, but not by enough to cause alarm.

 

This week more than makes up for the lack of economic news releases from last week, as there are more releases than is typical. The releases highlighted below have the potential to move the overall markets on the day they are released:

 

Date Release Release Range Market Expectation
7/14/2015 Retail Sales June 2015 0.30%
7/14/2015 Retail Sales ex-auto June 2015 0.50%
7/15/2015 PPI June 2015 0.30%
7/15/2015 Core PPI June 2015 0.10%
7/15/2015 Empire Manufacturing July 2015 3.5
7/15/2015 Industrial Production June 2015 0.20%
7/16/2015 Continuing Claims Previous Week NA
7/16/2015 Initial Claims Previous Week 283K
7/16/2015 Philadelphia Fed July 2015 12
7/16/2015 NAHB Housing Market Index July 2015 59
7/17/2015 CPI June 2015 0.30%
7/17/2015 Core CPI June 2015 0.20%
7/17/2015 Housing Starts June 2015 1123K
7/17/2015 Building Permits June 2015 1150K
7/17/2015 University of Michigan Consumer Sentiment July 2015 96.5

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

 

This week starts out on Tuesday with the release of the latest retail sales figures for the month of June, which is expected to show a slight increase of 0.3 percent, while retail sales excluding auto sales are expected to post a 0.5 percent gain. If these numbers come to fruition they would signal a very slow growing US economy, one that may not be able to sustain a rate hike. On Wednesday the Producer Price Index (PPI) for the month of June is set to be released with expectations of a gain of 0.3 percent, signaling a very low inflationary environment. If this number comes true it too would signal that the Fed may need to hold off on hiking a rate since the stated Fed targeted inflation rate is 2 percent. Also released on Wednesday is the Empire Manufacturing Index for the month of July, which is expected to come in at 3.5, very close to the inflation point of zero. A reading below zero signals a contraction in manufacturing while a reading above zero signifies an expansion in manufacturing. Lately the Empire manufacturing data has been all over the map, with two of the past four months being positive and two being negative. Hopefully we will get a clearer picture of what is to come with this release, but it seems unlikely. On Thursday the standard weekly unemployment related figures are set to be released with expectations that both figures have increased slightly over the course of the previous week; this should have little impact on the overall market. Of more interest to the overall market will be the Philadelphia Fed Index, which is expected to show a reading of 12, a slight decline from the 15.2 seen last month. The week wraps up on Friday with a number of releases, including two housing data points and the Consumer Price Index (CPI). The CPI is expected to show roughly the same meager amount of inflation that the PPI showed earlier in the week and once again this reading is well below the Fed’s target of 2 percent. Housing starts and building permits for the month of June are both expected to come in over 1.1 million units, which could be a positive development for the US housing market and provide a boost to the home builder stocks and potentially the housing sector. Wrapping up the week on Friday is the University of Michigan’s Consumer Sentiment Index for the month of July (first estimate), which is expected to show a slight increase over the level seen at the end of June, giving the index its fourth consecutive increase. Overshadowing the regularly scheduled economic news releases this week is likely going to be speeches from Fed officials including Fed Chair Yellen’s testimony in Washington DC before Congress on Wednesday and Thursday, during which time she will make prepared remarks and then take questions from members of Congress. While the question and answer period is always the most exciting, it is unlikely that any new information will come out during these sessions.
Fun fact of the week—The world’s largest radio telescope.

 

The world’s largest radio telescope is located in Puerto Rico. It measures 1,000 feet across and 167 feet deep and covers about twenty acres of ground. The giant telescope is currently being used to observe asteroids and meteorites that could be on a collision course with earth.

 

Source: National Astronomy and Ionosphere Center

 

 

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 click here Weekly Letter 7-6-2015

Commentary at a glance:

-The US markets moved lower last week as the world watched in amazement the situation in Greece.

-The deadline has passed and the vote has been counted—Greece said NO! Now what?

-Unemployment declined during the month of June; does that mean a rate hike is coming?

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

 

Market Wrap-Up: Greece continued to be the driving force behind the market movements globally last week as the June 30th deadline came and went without any payment from Greece to the IMF. Then in a massive show of defiance the Greek people voted “No” on the referendum that took place on Sunday (July 5th) in Greece. The charts below are of the three major US indexes in green with their respective trading ranges drawn by the red lines. The VIX (lower right pane below) is drawn with the index in green and the one year average level of the VIX drawn in red:

4 combined 7-6-15

Last week’s trading was light in the US as it was a holiday week with the markets being closed on Friday due to the Fourth of July holiday, but volume was higher than most holiday weeks given the situation in Greece and investors adjusting their positions for a wide variety of outcomes. Going into the week last week it was pretty clear that there would not be a deal struck between the lenders and Greece in time to make the June 30th payment deadline for the payment to the IMF. The markets discounted this fact and moved only marginally lower on the passing of the deadline with no deal. The VIX (fear gauge), however, took notice of the deadline passing and jumped higher, ending June 29th nearly 35 percent higher than it started the day in the largest single day move we have seen on the VIX in a very long time. The move was short lived, however, as the VIX moved lower on the following two trading days, but still ended the week nearly 20 percent higher than it started.

 

From a technical standpoint, last week saw all three of the major US indexes break down below their most recent trading ranges, before all three made good attempts at returning to the trading ranges. The S&P 500 (upper left pane above) is tied with the NASDQ (lower left pane above) for the strongest position from a simple technical standpoint. The Dow is clearly in last place from a technical standpoint as it broke through its lower bound support level and then failed to get very close to its previous trading range in the bounce back at the end of the week. As mentioned above, the VIX had a very wild week with some of the most volatility we have seen in several months; and for the fourth time in the past three months managed to close above the 52-week average level of the VIX. With the breakdown of the most recent trading range on the three major indexes having occurred last week, it looks like we could be in for a little more downward movement in the markets, especially if the situation in Greece remains unsolved for an extended period of time.

 

International News: International news last week was all about the situation in Greece and what it means now that the deadline passed without a payment to the IMF. As mentioned above, it was pretty clear going into last week that there was not going to be a payment on June 30th, so the markets had a somewhat muted reaction to the deadline passing. One of the other reasons the reaction was muted is because of the term the IMF put on Greece when the country missed its payment. The IMF, not being a traditional bank, made the announcement shortly after midnight local time on June 30th that Greece was in “arrears” on its payment; the IMF went to great length to avoid saying the word “default.” Only the lender can label a sovereign country as in default and with the IMF not doing so the rating agencies cannot even label the country as in default. The different is that if Greece makes the payment in full plus any penalties for it being late, the whole episode will essentially be swept under the rug, but Greece will still have a hard time borrowing funds from the international community going forward because banks have a very long memory, even if Greece was technically in arrears and not a default. However you look at the terms being used, Greece is in a very tight spot because it is in desperate need of cash and will not be receiving any more funds from the international community until everything is straightened out. The Greek banks are going to feel the strain first if the ECB does not increase the emergency lending to them, as they are quickly running out of actual paper euros to give out to depositors. This even takes into account the capital controls currently in place, which limit the daily withdrawals of Greek citizens to 60 euros per day. Without the support of the ECB the banks are literally going to have to say “sorry, we do not have any cash to dispense at this time.” This in turn will likely cause even more panic and damage to an already hobbling economy. The referendum vote was held in Greece on Sunday and the voter turnout was poor; only about 63 percent of the people voted, but of the people who voted it was clear that the “No” party won the day. So what does that vote actually mean? It means that any further negotiations will almost have to start from square one, which is a good thing since the finance minster of Greece was relieved of his duties shortly after the vote on Sunday evening. Greece is in a very weak position, however, as it needs funds and appears unwilling to do what the lenders are demanding in order to free up cash. Most likely someone will throw Greece a life line in the coming days that buys the country more time to negotiate a new deal after the results of the referendum have been digested by the international community. The underlying problems of Greece, however, is that it is not competitive in the global economy and has far too high of government spending given the current amount of government incomes. Greece would need structural reforms to begin to emerge from this situation, reforms which apparently no one in Greece is in favor of undertaking. At least Greece is a very small economy in the grand scheme of things, so even if it does default and get kicked out of the EU and off the Euro it is unlikely to cause meaningful damage to the rest of the global economy. China, however, is another story as it is a very large economy going through some unusually turbulent times in its financial markets.

 

What initially looked like a bull market run on steroids for the past year, during which the main local Chinese stock market increased by more than 100 percent, has started to come unraveled very quickly over the past three weeks as the Shanghai Se Composite Index has declined by more than 25 percent. Much of the decline has been due to the government attempting to crack down on wild speculation by investors through lowering the margin limits and making it more difficult for foreign investors to add fuel to the fire. The latest action taken was by the People’s Bank of China (PBOC) as it announced that it would be lending money to brokers in order to allow the brokers to buy into the falling stock market. The theory is that the brokers would be able to stop or at least slow the massive decline long enough for other people to see it as the opportunity to get back into the market. This action was the clearest signal that the government’s trying to limit speculation had a greater negative impact than expected and for sure a more negative impact than is desired. It is funny that speculation by everyday investors is frowned upon once it gets out of hand and yet the government is speculating through the PBOC to try to stop the decline it created. How the government in China deals with its current stock market bubble could have wide spread impacts on the global economy because unlike Greece, China does have the ability to slow global growth if it hits the brakes too hard.

 

National News: Nothing was happening in the national news last week as the focus of almost all news was on Europe and the upcoming holiday weekend. Congress was not in session; neither was the Supreme Court. Even speculation about when the Fed would potentially start to increase interest rates was toned way down. Part of that may have been due to the Fed watching and taking into account world events such as the situation in Greece, even though the Fed is fully dependent on data coming from the US economy. Puerto Rico looks like it could be the next issue the markets here in the US lock onto as there were several announcements made last week about the country’s outstanding debt and subsequent inability to make debt payments. This will be explored more in-depth with next week’s commentary.

 

Market Statistics: All three of the major US indexes moved lower over the course of the previous week as investors and money managers alike adjusted their positions going into the Greek deadline. Volume overall was way below the weekly average, but after accounting for Friday being a market holiday, it was slightly above the average holiday weekly volume:

 

Index Change Volume
S&P 500 -1.18% Below Average
Dow -1.21% Below Average
NASDAQ -1.40% Below Average

 

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

 

Top 5 Sectors Change Bottom 5 Sectors Change
Residential Real Estate 1.13% Materials -2.84%
Utilities 0.98% Energy -2.55%
Insurance 0.19% Oil & Gas Exploration -2.51%
Biotechnology -0.65% Semiconductors -2.30%
Consumer Goods -0.76% Telecommunications -2.21%

As you can see in the above sector performance, there really was not much differentiation between the top and bottom performing sectors last week. There seemed to be a lot of correlation among the sectors as they moved lower. Real Estate got a little boost from the Case-Shiller Home Price index released early during the week and the perceived differences between investing in real estate and investing in the equity markets. Utilities had a good week after the situation in Greece unfolded since investors seemed to be seeking out the secure dividend payments of the sector in advance of uncertainty over when the Fed will increase interest rates at home in the US. The materials sector led the pack, moving lower thanks to uncertain demand out of China as the country deals with the financial uncertainty currently present in its markets. Oil and energy had rough weeks as the talks between Iran and the US over Iran’s nuclear programs came to their June 30th deadline, but both sides agreed to keep talking past the deadline since they were making progress. Oil moved lower because this continued talking means there is still a strong chance that Iranian oil may be hitting the open market at some point during 2015, bringing even more supply into a market that is already seeing weak demand.

The US fixed income market moved surprisingly little given the missed debt payment by Greece, but that could have been because of the shortened trading week and the end of the second quarter of 2015:

Fixed Income Change
Long (20+ years) 0.89%
Middle (7-10 years) 0.71%
Short (less than 1 year) 0.02%
TIPS 0.62%

The US dollar made it two weeks in a row of gains last week, gaining 0.68 percent as uncertainty over what happens next in Europe with Greece made some investors favor the safety of the US dollar. The Japanese Yen was the best performing of the major global currencies as it gained 0.62 percent against the value of the US dollar. The weakest performing currency of the major global currencies was the Canadian Dollar as it gave up 1.82 percent against the value of the US dollar. Much of the move in the Canadian dollar can be attributed to the decline in oil since oil is such a large part of the overall Canadian economy.

Last week commodities were mixed, but the real story was the continuation of the jump we saw in the Grains market extending for a second week:

Metals Change Commodities Change
Gold -1.16% Oil -5.26%
Silver -0.53% Livestock 3.45%
Copper 0.16% Grains 6.70%
Agriculture 2.47%

The overall Goldman Sachs Commodity Index turned in a gain of 0.19 percent last week despite oil moving lower. Oil gave up 5.26 percent last week, as mentioned above, primarily due to the ongoing talks between the US and Iran.

Metals were mixed last week with Gold giving up 1.16 percent, while Silver decreased 0.53 percent and Copper bucked the trend, advancing by 0.16 percent. Soft commodities were very mixed last week with Livestock ending a three week slide with a gain of 3.45 percent, while Grains jumped 6.7 percent, giving grains a two week advance of more than 15 percent. Much of the increase in the grain prices is due to crops becoming too wet in the Midwest as some of the winter crops have yet to be able to be harvested and are now receiving far too much water. Agriculture jumped higher by 2.47 percent with much of the jump being on the back of the grains move.

On the international investing front the best performing country index was found in Malaysia with the Kuala Lumpur Composite Index gaining 1.4 percent. The worst performing index of the major global financial indexes last week was found in China—for the third week in a row. The Shanghai based Se Composite Index fell 6.70 percent over the course of the previous week. Over the course of the past three weeks the index has now declined by more than 25 percent as the government continues to try to reign in speculative investing in the financial markets and now looks like it might have gone a little too far.

We finally saw the VIX come back to life last week even if it was short lived. The VIX, on the 29th of June, jumped the most it has jump in a single day in a very long time, closing the day with a gain of nearly 35 percent. This, however, was followed by three consecutive days of the VIX moving lower to close out the week, but for the week the VIX still gained 19.76 percent. At the current level of 16.79, the VIX is implying a move of 4.85 percent over the course of the next 30 days. As always, the direction of the move is unknown.

For the shortened trading week ending on 7/2/2015, returns in my hypothetical models* (net of a 1% annual management fee) were as follows:

  Last Week
Aggressive Model -1.15 %
Aggressive Benchmark -1.40 %
Growth Model -0.80 %
Growth Benchmark -1.09  %
Moderate Model -0.42 %
Moderate Benchmark -0.78 %
Income Model -0.17 %
Income Benchmark -0.38 %

*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.

 

I made no changes in my models over the course of the previous week as I was unsure of the direction of the vote in Greece and was positioned with an increased level of cash and other defensive positions in my least aggressive models. With the fallout looking to be far from over in Greece, I will continue to look for investment opportunities with an eye toward safety until more is known.

 

Economic News:  During the shortened trading week last week the focus of the economic news releases were the US consumer and the unemployment picture for the US economy. There was a single release that missed market expectations by a significant amount (highlighted in red below) and a single release that significantly beat market expectations to the upside (highlighted in green below):

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Slightly Negative 6/29/2015 Pending Home Sales May 2015 0.90% 1.40%
Neutral 6/30/2015 Case-Shiller 20-city Index April 2015 4.90% 5.60%
Neutral 6/30/2015 Chicago PMI June 2015 49.40 50.00
Positive 6/30/2015 Consumer Confidence June 2015 101.40 97.50
Neutral 7/1/2015 ADP Employment Change June 2015 237K 220K
Neutral 7/1/2015 ISM Index June 2015 53.50 53.20
Neutral 7/2/2015 Initial Claims Previous Week 281K 270K
Neutral 7/2/2015 Continuing Claims Previous Week 2264K 2231K
Neutral 7/2/2015 Nonfarm Payrolls June 2015 223K 230K
Neutral 7/2/2015 Nonfarm Private Payrolls June 2015 223K 225K
Slightly Positive 7/2/2015 Unemployment Rate June 2015 5.30% 5.40%
Negative 7/2/2015 Factory Orders May 2015 -1.00% 0.20%

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

 

With last week being a shortened trading week all of the economic news releases were packed into just four trading days. The week started off on Monday with the release of the pending home sales figure for the month of May, which came in slightly below expectations at 0.9 percent, while expectations had been for 1.4 percent. This release was hardly noticed by the markets as all attention seemed to be consumed by Greece at the time. On Tuesday a second piece of housing market information was released, the Case-Shiller 20-City Home Price index for the month of April, which showed that home prices on average during the month of April increased at an annual rate of 4.9 percent. Denver saw the highest level of growth in the report, gaining 10.3 percent, beating out even San Francisco, which grew at 10 percent. Also released on Tuesday was the Chicago area PMI and the consumer confidence figure as measured by the government for the month of June. The Chicago PMI was slightly disappointing, but with expectations being at the inflection point of 50.0 any reading within 1 of the number was within the realm of expectations. The reading of 49.4 does show a contraction in the manufacturing sector in the greater Chicago area, but it was only a very slight contraction. The biggest news of the day was the consumer confidence figure, which came in at 101.4, while the markets had been expecting a reading of 97.5. The reading of 101.4 was tied for the second highest reading we have seen on the index going all of the way back to 2008. While confidence is good, spending is even better. So far spending has been lagging confidence, but that may change in the near future. On Wednesday the ADP Employment change figure for the month of June was released and came in showing more jobs than were expected; 237,000 versus expectations of 220,000. This release on Thursday was the first sign that the overall unemployment rate in the US may show improvement. The ISM Index for the month of June was also released on Wednesday and came in nearly exactly in line with expectations and was therefore a non-market moving event. On Thursday the standard weekly unemployment figures both came in slightly higher than expected, but the releases were overshadowed by the government’s employment data, which was released one day earlier than normal due to the market holiday on Friday. Nonfarm public and private payroll figures both came in at 223,000 which was slightly lower than expectations, but the overall unemployment rate was shown to have decreased by one tenth of a percent, from 5.4 down to 5.3 percent, during the month of June. Labor force participation was also released in the same government report as the unemployment information and showed a decline to 62.6 from 62.9, which may not sound like much, but the key is that with the downward move it broke the trend of three consecutive months in a row of improving participation. It is also now at the lowest point we have seen in the past year and may account for a good portion of the one tenth of a percent decline in the overall unemployment rate. Wrapping up the week on Thursday was the release of the Factory orders data for the month of May, which showed a bit of a decline with overall orders falling by one percent while the market had been expecting an increase of 0.2 percent. The factory orders data does however line up the less than stellar manufacturing data we were seeing throughout the month of May.

 

This week is a very slow week for economic news releases as it appears that most of the reporting companies and agencies just extended their Fourth of July holidays. The release highlighted below has the potential to move the overall markets on the day it is released:

 

Date Release Release Range Market Expectation
7/6/2015 ISM Services June 2015 56.3
7/7/2015 Consumer Credit May 2015 $18.2B
7/8/2015 FOMC Minutes June Meeting
7/9/2015 Initial Claims Previous Meeting 276K
7/9/2015 Continuing Claims Previous Meeting 2230K

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

 

This week starts on Monday with the release of the Services side of the ISM index for the month of June. Last week the overall ISM index came in very close to market expectations and it seems there should not be much of a deviation on the services side of the index either. On Tuesday consumer credit for the month of May is set to be released with expectations of an expansion of $18.2 billion, slightly less than the $20 billion seen in April. On Wednesday the latest FOMC meeting minutes are set to be released, but since there was no action taken and most of the pertinent information was released at Fed Chair Yellen’s press conference after the last meeting, it is unlikely that the minutes will hold any new information that the markets do not already have priced in. This week wraps up on Thursday with the release of the standard weekly unemployment figures for the previous week. Expectations are for both figures to have come down slightly over the previous week, but it would take a very wide deviation from the expected for these two releases to have any noticeable impact on the overall markets.

 

Fun fact of the week—Crazy growth in China

 

According to data released by the China Securities and Depository and Clearing, there were 10 million new stock account opened up in China during the first four months of 2015. That number is larger than all stocks accounts that were opened during 2012 and 2013 combined!

 

It is no wonder they are having a stock market bubble J

 

Source: http://www.forbes.com

 

For a PDF version of the below commentary please click here Second Quarter 2015 in Review

Second Quarter 2015 in Review: The second quarter of 2015 saw two main themes that drove the markets either up or down depending on the news driven headlines: Greece and the Fed’s looming rate decision. Greece and the situation in Greece finally coming to a head—sort of—was the main driving force behind market movements for the quarter. Going into the second quarter of 2015, Greece was on a bit of life support, needing more and more money from the European Central Bank (ECB) and International Monetary Fund (IMF) to service its outstanding debts. Each month during the quarter there seemed to be a crisis and uncertainty over whether the country would do enough to unlock more funds from the Europeans. In late May, the negotiations were going so poorly that Greece decided to roll all of its June payments to the IMF into a single payment at the end of the month, as opposed to several smaller payments throughout the month; leaving the end of June as the hard deadline for a deal to have been struck to unlock funds. The negotiations continued throughout June, with the global financial markets casually watching, but not reacting much, as this type of haggling had taken place so many times before and each time a deal was struck at the last minute. Only this time was different. The talks broke down during the last week of June and Prime Minster Alexis Tsipras called for a referendum vote by the Greek people to see if they backed the terms of the bailout the creditors outlined. The vote was held on July 5th, 5 days after the bailout program end, and resulted in the Greek people voting “No” on the referendum, which essentially means they voted against further austerity and bailout money from the rest of Europe. While this vote was a surprise, both that it was called for and that it was so lopsided with a “No” vote, the global financial markets had been preparing for such action and any other potential outcome. The contagion fears were alleviated as the ECB stepped in and stated that the problems with Greece would not be systemic to all of Europe and put large amounts of cash to work through its quantitative easing program. But what the vote in Greece and ongoing negotiations mean for the longer term fate of both Greece and the Euro as a common currency will not be seen for potentially many years to come. The second driving force behind much of the market movements during the second quarter of 2015 was the continued speculation about when the US Federal Reserve would start to increase interest rates.

 

Throughout the quarter there was rampant speculation about when the Fed would increase interest rates from the zero bound they have been stuck on since the downturn in 2008. Throughout the quarter the lift-off date was a moving target. During the quarter the Fed dropped the word “patience” from its statement, which many on Wall Street took to believe that a rate hike was coming within the following two meetings. However, when the term was dropped a new one was added—“impatience.” In changing words, Fed Chair Yellen made her intentions of being data dependent very well known. She is still looking for signs that the US economy is strong enough for her to increase interest rates. In typical Fed policy, interest rates are increased when the economy is ahead of itself and rising too rapidly; as an increase in rates causes the economy to slow down. Interest rates are cut (lowered) when the Fed thinks the economy needs a little boost to either grow faster or to stem a downturn, such as in 2008 when they cut rates to zero. As you may guess, the Fed is currently in a tight spot as the US economy is not growing as fast as the Fed would like, but interest rates need to increase so the Fed is not boxed into a corner should something bad happen in the US economy in the near future. Why does this matter to the financial markets? This matters to the financial markets because the US is the world’s largest and most financially important economy. The US government bonds are also the gold standard of safe fixed income investments around the world; but therein lays the problem. As interest rates are moved higher by the US Fed, the value of outstanding fixed income investment will for the most part move lower, meaning outstanding bonds will see capital losses. Now one difference between fixed income and stocks is that there is typically a defined maturity on a bond, at which time par is paid back, so while losses on bonds may happen quickly as interest rates increase, the losses will slowly be made back over the life of the bond so that it is equal to par at maturity. With many billions of dollars invested in fixed income investments by large money managers and individual investors alike, it is no wonder that the timing for an interest rate hike has such a large impact on the overall financial markets. Right now the odds are still strong that there will be an increase in the Federal Funds rate during 2015, but the odds have been coming down recently as the GDP numbers for the first quarter have been revised and weakness in Europe seems to remain a potential major issue for the global economy.

 

Looking ahead: In looking to the future it is unlikely that there will be many changes in terms of the driving forces behind the global financial markets; Greece still has a long way to go to end its financial situation and the Fed will still be watching the data for a signal that now is a good time to increase interest rates. I am in the camp that the Fed will probably have a hard time justifying an increase in interest rates during 2015, but that doesn’t mean the Fed won’t do it. There is such a myriad of economic data points that at any given time the Fed could point to one or two factors and reasonably make the case for increasing interest rates. The Fed wants to increase rates and will increase rates at some point during the next 12 months, but it very well might raise rates once and stay at the new level for an extended period of time. This does not seem like it will be the slow and steady quarter of a percent increase at each meeting as we have seen in the past when the Fed increased interest rates in a very methodical way.

 

Greece will likely remain unresolved as the country is technically in default on its loan to the IMF, but so far the word “default” has not been used by the IMF. The IMF has said that Greece is in arrears on its payment. Even if Greece does ultimately default on its outstanding debt, exactly how the situation would unfold in terms of staying in the EU and potentially on the Euro remains very uncertain. The most likely outcome is that the Europeans come up with a set of rules in terms of financially helping Greece. The rules will probably involve a lot of strings and spending cuts that the Greek people will not be comfortable with and in the end will likely reject. This scenario saves face for Europe and really puts the Greeks in charge of their own destiny if they reject the offer and have to get off the Euro and potentially out of the EU. This action would be detrimental to the economy in Greece as travel from the rest of Europe to Greece may be held up and trying to manage and run its own currency (presumably a version of the Drachma) would be a very daunting task.

 

The direction of the financial markets for the rest of the year is most likely for the markets to chop around in the fairly wide trading range they have been trading in since the beginning of February. Events will drive them up and down, but to actually break down below or breakout above the current trading range would take more than just speculation, we would need to see some fundamental changes take place. Oil and gas remains the area with the most potential upside going forward, primarily because it is the sector of the market that has seen the widest divergence from the overall performance of the markets. While oil going back over $100 per barrel seems unlikely, it does still seem like there is a decent amount of upside potential given the geopolitical risks that are ever present in the Middle East.

 

Have a great third quarter of 2015!

 

Peter Johnson


Time for the Second Quarter Numbers: The following is a numerical representation of the second quarter of 2015. I will start with the three major US indexes and the VIX, which turned in performance as follows:

 

Index 2nd Quarter 2015
VIX 19.23 %
NASDAQ 1.75%
S&P 500 -0.23%
DJIA -0.88%

 

Only the NASDAQ managed to pull out a gain for the second quarter of 2015, thanks in large part to a few select IPOs that took place over the course of the quarter and helped drive a positive return. The quarter was looking positive until the final two trading days when the situation in Greece took a noticeable toll on the markets. The markets moving lower on the last two trading days of the quarter also corresponded to the spike we saw in the VIX, which took the VIX from a loss for the quarter to gaining nearly 20 percent for the quarter, thanks in large part to a jump of more than 34 percent on the 29th of June.

 

Globally, the top three performing indexes for second quarter of 2015 were:

 

Index 2nd Quarter 2015
China Shanghai Se Composite Index 14.12 %
Russia Capped Index 8.37 %
Hong Kong Hang Seng Index 5.42 %

 

China went on an amazing run during the second quarter, albeit because of massive speculation and leverage being employed by investors. At one point in early June the Shanghai based Se Composite Index was up nearly 40 percent for the quarter, but that came to an abrupt end during the middle of June when the government in China started to clamp down on “speculation and leverage” in the financial markets. The index corrected in the sharpest correction of the past few decades, declining more than 25 percent over the course of just a few days. Russia made few headlines throughout the quarter and thus had a pretty good quarter seeing its main index gain more than 8 percent, but you may remember that it was coming off a very low point to start the quarter.

 

Globally, the bottom three performing indexes for Second quarter of 2015 were:

 

Index 2nd Quarter 2015
France Paris CAC-40 Index -8.53 %
Sweden OMX Stockholm 30 Index -7.56 %
Australia Sydney All Ordinaries Index -7.01 %

 

Commodity dependent countries as well as Europe struggled during the quarter as uncertainty seemed to run rampant during the quarter in those two specific areas. France turned in the worst performance as political unrest accompanied by uncertainty in Greece seemed to hit the country particularly hard. Sweden and Australia both declined in excess of 7 percent as institutional money managers assessed which counties would benefit the most and least from the ongoing situations around the world. Sweden was hit because of its currency, the Krona, and the strength that managers were seeing relative to the Euro, which in turn would make all exported goods from Sweden more expensive to the buyer. Australia is primarily a metals and mining based economy so with metal prices moving lower on the quarter and demand out of China slowing it was not surprising to see the main Australian stock index move lower.

 

For those of you who follow and are interested in the style box performance of various investments throughout the quarter, below is the standard style box performance for second quarter 2015:

 

Style /  Market Cap Value Blend Growth
Large Cap 0.36 % -0.40 % 0.16 %
Mid Cap -1.44 % -1.78 % -2.02 %
Small Cap 0.67 % -0.29 % -4.05 %

The style box performance was interesting for the second quarter of 2015 as Mid Caps saw the worst performance while Large Caps saw the best performance. Small Caps saw the worst performance as Small Cap growth got hit very hard due to a large risk off trade taking place during the quarter. With Small Cap growth historically being the most risky asset class when a risk off trade takes place, it is the first of the style boxes to move lower.

 

The following table gives the performances for the top-performing sectors for the second quarter of 2015:

Sector Change
Biotechnology 7.44%
Healthcare Providers 7.43%
Financial Services 5.05%
Regional Banks 4.99%
Software 3.51%

 

Biotechnology and Healthcare continued to fly high during the second quarter as they have been for the past 18 months. Mergers and acquisitions as well as several new key FDA approvals during the quarter helped drive the strong performance.

 

The bottom-performing sectors for the second quarter of 2015 were as follows:

 

Sector Change
Real Estate -10.11%
Transportation -7.43%
Utilities -7.25%
Aerospace & Defense -3.75%
Oil & Gas Exploration -3.63%

 

Real Estate was the worst performing sector of the major sectors during the second quarter of 2015 as investors seemed to be booking some of the long term gains the sector had seen over the previous few quarters. The transportation sector moved lower during the quarter, thanks in large part to the port strike that took place at the west coast sea ports in the US due to a longshoreman strike. Utilities is the only other sector I wanted to point out above as the sector had a very rough quarter as investors who had jumped into the sector for the dividends that are paid jumped out during the quarter as performance started to decline with investors booking long term profits.

 

Commodities continued to see very volatile trading throughout the second quarter of 2015. Returns were as follows:

 

Commodities Change
GSCI Commodity Index 8.26 %
Silver -5.65 %
Copper -5.05 %
Gold -1.13 %
Oil 24.94 %

 

Oil staged a bit of a comeback during the second quarter as it gained nearly 25 percent. While some of this gain can be attributed to political uncertainty over Iran and the encroachment of ISIS further into oil producing areas of Iraq, the rest of the gain was due to supply and demand dynamics as well as traders adjusting to oil rigs in the US being idled or turned off, as can be seen in the rig count numbers that were put out during the quarter. Overall, the Goldman Sachs commodity index gained more than 8 percent for the quarter, thanks in large part to the gains seen in oil. Metal all moved lower during the quarter as uncertainty over future demand from China seemed to weigh heavily on the metals.

 

The fixed income market had a very interesting quarter with yields on various government bonds swinging wildly on speculation about when the US Federal Reserve will begin to raise interest rates:

 

Fixed Income Change
20+ Year Treasuries -9.55 %
10-20 Year Treasuries -3.57 %
7-10 Year Treasuries -2.66 %
3-7 Year Treasuries -0.63 %
1-3 Year Treasuries  0.10 %
TIPS -1.36 %

 

Negative performance was seen across the board except in the 1 to 3 year Treasuries as investors seemed to be adjusting and readjusting their fixed income positions very frequently as new data was released that either made them think a move by the Fed was coming sooner or a little later than prior to the data release. With the Fed not raising rates during the quarter it still looks like a rate hike is in store at some point during 2015 and when it occurs the majority of the fixed income markets will likely move lower.

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

Commentary at a glance:

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

-Greece-Greece-Greece; ENOUGH ALREADY!

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

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

 

Market Wrap-Up: Greece continued to be the driving force behind the market movements globally last week with a deal potentially within reach at the start of the week, only to see the week come to an end with no deal and few prospects for one. A referendum vote has been called for and will be held in Greece on July 5th. The charts below are of the three major US indexes in green with their respective trading ranges drawn by the red lines. The VIX (lower right pane below) is drawn with the index in green and the one year average level of the VIX drawn in red:

4 combined 6-29-15

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

 

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

 

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

 

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

 

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

Fed rates 6-29-15

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

 

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

 

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

 

Top 5 Sectors Change Bottom 5 Sectors Change
Home Construction 2.30% Global Real Estate -6.03%
Healthcare Providers 2.14% Semiconductors -4.09%
Regional Banks 0.83% Real Estate -3.35%
Consumer Discretionary 0.39% Technology -3.31%
Financial Services 0.25% Utilities -3.27%

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

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

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

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

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

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

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

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

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

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

Economic News:  Last week the focus of the economic news releases was the health of the US economy overall. There was a single release that missed market expectations by a significant amount (highlighted in red below) and no releases that significantly beat market expectations to the upside:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Neutral 6/22/2015 Existing Home Sales May 2015 5.35M 5.26M
Negative 6/23/2015 Durable Orders May 2015 -1.80% -0.50%
Neutral 6/23/2015 Durable Goods -ex transportation May 2015 0.50% 0.60%
Neutral 6/23/2015 New Home Sales May 2015 546K 525K
Neutral 6/24/2015 Q1 2015 GDP – Third Estimate Q1 2015 -0.20% -0.20%
Neutral 6/25/2015 Initial Claims Previous Week 271K 271K
Neutral 6/25/2015 Continuing Claims Previous Week 2247K 2210K
Neutral 6/25/2015 Personal Income May 2015 0.50% 0.50%
Slightly Positive 6/25/2015 Personal Spending May 2015 0.90% 0.70%
Slightly Positive 6/26/2015 University of Michigan Consumer Sentiment June 2015 96.1 94.8

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

 

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

 

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

 

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

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

 

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

 

Fun fact of the week—Greek voting

 

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

 

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

 

Have a great week!

 

Peter Johnson

 

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

Commentary at a glance:

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

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

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

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

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

 

Market Wrap-Up: Concerns over the fate of Greece, combined with a Federal Reserve meeting during the middle of the week, provided the main driving force behind what turned out to be a very choppy week for the US financial markets. The charts below are of the three major US indexes in green with their respective trading ranges drawn by the red lines. The VIX (lower right pane below) is drawn with the index in green and the one year average level of the VIX drawn in red:

4 combined 6-22-15

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

 

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

 

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

 

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

 

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

Fed rates 6-22-15

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

 

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

 

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

 

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

 

Top 5 Sectors Change Bottom 5 Sectors Change
Biotechnology 3.73% Oil & Gas Exploration -1.23%
Healthcare Providers 3.34% Natural Resources -0.96%
Healthcare 2.21% Broker Dealers -0.78%
Residential Real Estate 2.15% Energy -0.71%
Medical Devices 1.88% Regional Banks -0.70%

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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

 

Economic News:  Last week the focus of the economic news releases was the health of the US economy overall. There was a single release that missed market expectations by a significant amount (highlighted in red below) and one release that significantly beat market expectations to the upside (highlighted in green below). The interesting thing is that both of them were manufacturing related:

 

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

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

 

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

 

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

 

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

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

 

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

 

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

 

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

 

Source: http://www.mashable.com

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