For a PDF version of the below commentary please click here Weekly Letter 3-2-2015

Commentary at a glance:

-US markets failed to gain much traction and move much in either direction.

-Department of Homeland Security—funded, not funded, funded for a week?

-China cut rates once again.

-Chair Yellen had an amusing time on the Hill last week; the markets were less amused.

-Economic data continues to show weakness in the US; consumer confidence is the latest casualty.

 

Market Wrap-Up: There was only one major change that occurred last week from a technical standpoint on any of the three major US indexes and it was a negative development. The charts below are of the three major US indexes in green with their respective trading channels being 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 with the red line:

4 charts 3-2-15

From a technical standpoint the standout index remains the NASDAQ (lower left pane above), which is much higher than its most recently trading range and looks like it will keep trying to advance. Much of the move on the NASDAQ could be because it is finally closing in on a new all time high over the technology bubble level seen back in early 2000, as mentioned last week. Both the S&P 500 (upper left pane above) and the Dow (upper right pane above) look much less exciting and, in fact, one of them turned negative last week. Over the course of the previous week the S&P 500 moved from the middle of its trading channel down toward the lower end of the channel. While it stopped short of breaking through the lower end of the channel, it is still a concerning technical move. The Dow, on the other hand, is even more concerning based on this trading channel indicator, as it failed to stay within its range last week, falling below the lower edge of the channel during trading on Friday. This move does not necessarily mean a further decline is imminent, but it does raise a yellow cautionary flag. If you think of the three indexes as different levels of risk with the NASDAQ being the highest risk the S&P 500 being in the middle and the Dow being the least risky of the three, last week was a “risk on trade” as the NASDAQ was pushed higher, while the Dow suffered a decline. Going forward it really looks like the markets will meander around waiting for something to provide it with direction, with the exception of the NASDAQ running for a record close. This direction could easily come in either a positive form or negative, but from several valuation metrics the markets are a little over priced, meaning a downward move may be the likely outcome from any unforeseen events. While the markets were searching for direction, so too was the VIX as it moved to a new low for 2015, but did not make much of a percentage move over the course of the week.

 

National News: While Washington DC may have been unusually quiet two weeks ago, it made up for the lack of attention last week as there was a lot happening and not happening at the same time. The first news of the week was the official veto of the “Keystone XL Pipeline Approval Act” early last week with the President citing a lack of “thorough consideration of the issues” as one of the reasons for his vetoing the bill. The bill is now being sent back to the Senate where its future is very uncertain. At least in current form it looks like there are not enough votes (approximately 3 short) for the measure to get a presidential veto override. So that leads us to the current debate in Washington DC surrounding the funding of the Department of Homeland Security (DHS). Late last year during a budget fight the Republicans got a measure attached to the budget that allowed for the passage of the budget, but that only funded the DHS through the end of February 2015. This was done so the Republicans could try to force the President’s hand on the new immigration laws he signed into law with executive order late last year. Since the DHS is the department responsible for enforcing the new laws or not enforcing the old laws, this was the target group of the debate. On Friday, there was a lot of horse trading going on, but in the end there was no major deal struck between the two sides in Congress. What did they do? They created a one week extension for DHS funding, in a sense kicking the can down the road a very small distance. What doesn’t make any sense is that nothing was done over the past three months, despite everyone knowing that the funding was going to dry up at the end of February, and nothing was able to be accomplished in the last minute dealing last week, so why is anything substantially better expected to be hammered out this week? Wall Street, while concerned about the DHS, does not seem to be reacting to the gridlock that permeates Washington DC, but Wall Street does seem to be a little more on edge because the gridlock shows that Congress may not have the wherewithal to do anything should an actual emergency that requires their approval actually come up. In addition to the debates about DHS funding and the Keystone XL Pipeline, last week there was a special guest on the Hill, the Chair of the Federal Reserve Janet Yellen, who gave her semiannual testimony about the state of the US economy to both chambers of Congress over Tuesday and Wednesday last week.

 

As usual, her prepared statement said nothing new and was verbatim from what has been released previously, but the question and answer section of the sessions held some good fun for the chair. The main topic members of Congress wanted the chair to address was the issue of auditing the Fed or Congressional oversight of the Fed. This in general is seen as a very bad idea by most of Wall Street and everyday Americans for several reasons. Congress is not exactly known for making quick and correct decisions and the US Federal Reserve has to be able to act and do so very quickly in some circumstances, such as bailing out big banks in 2008 or risk an all out collapse of the US financial system. Second, Congressional members, for the most part, have no idea about our monetary and fiscal systems in the US and having them make large fiscal decisions would be tantamount to asking them to design the next space shuttle since they can all look up and see outer space. More important to the financial markets were the questions about when the Fed would start to normalize interest rates and by how much Chair Yellen thought interest rates would need to increase. Again, she did a fine job of not giving a straight answer, despite numerous attempts for one from various members of Congress. She did address the term “Patience” in the wording of her Fed statement in saying that just because it may or may not be removed does not mean that an interest rate hike is imminent at the next meeting. In general, it seems she really is going to wait until the data and information she is watching is showing without a doubt that it is time to increase interest rates. The markets are currently pricing in a first rate hike at the September meeting; this is back a little from the June meeting, which was the initial expectation of the markets. Whatever the market is expecting can change very quickly with the release of more up to date economic news releases. Without the presence of inflation there really is no rush for the Fed to take action at this point. Taking action would really just give the Fed more options for dealing with uncertainty in the future as its back would no longer be against the zero interest rate wall as it is currently. While all of this was going on in Washington, earnings season for the fourth quarter of 2014 was starting to wind down.

 

Last week was a very busy week for earnings releases as there were many household names that released earnings with a very wide mix of positive and negative results being shown. Below is a table of the better known companies that released earnings last week with earnings that missed expectations highlighted in red, while earnings that beat expectations by more than 10 percent are highlighted in green:

 

3D Systems -35% Domino’s Pizza -2% Ross Stores 8%
Alleghany -12% Gap 1% Salesforce.com 0%
Aqua America 4% Hewlett-Packard 1% Sanderson Farms 4%
Babcock & Wilcox 42% Home Depot 12% Sears Holdings 0%
Big 5 Sporting Goods 19% J C Penney -100% SeaWorld Entertainment -50%
Campbell Soup 2% Kate Spade pushed South Jersey Industries -20%
Comcast 0% Kohl’s 2% Sturm Ruger & Co 26%
Cooper Tire & Rubber -27% Liberty Media 5% Target 3%
Crocs -19% Lowe’s Companies 5% TJX Companies 3%
Dillard’s -1% Macy’s 1% Toll Brothers 47%
DISH Network 105% Papa John’s 4% Vitamin Shoppe 0%
Dollar Tree 1% Pinnacle Foods 0% WebMD Health 16%

 

According to Factset Research, we have now seen 485 (97 percent) of the S&P 500 companies release their results for the fourth quarter of 2014. Of the 485 that have released, 76 percent have met or beaten earnings estimates (up 1 percent from two weeks ago), while 24 percent have fallen short of expectations. When looking at the revenue of the companies that have reported, 59 percent of the companies have beaten estimates (up 1 percent from two weeks ago), while 41 percent have fallen short. The major driving sectors behind the strong earnings announcements have been telecommunications and healthcare, while the laggard, not surprisingly, continues to be energy. Forward looking guidance continues to be a major issue for many companies as they are citing a multitude of potential reasons for slower future growth, everything from Europe uncertainty to dollar strength, the US Fed policy or the declining price of oil. In total, 81 component companies of the S&P 500 have announced negative forward guidance; this compares to just 15 companies that have raised their forward guidance after posting their fourth quarter numbers. With such a large percentage of the forward looking guidance being negative it seems the first quarter or two of 2015 for corporate America may be a little more difficult than first thought. At this point it is becoming virtually impossible for the numbers, as far as the number of companies beating or earnings or revenues, to change much from their current levels. The numbers above are likely what they will be for the quarter which means the fourth quarter of 2014 will go down as a better than average quarter, but one that saw some darkening clouds on the horizon.

 

This week sees a massive drop off in the quantity of companies releasing their fourth quarter earnings numbers, as compared to the past few weeks. While there are still a few companies that are well known, it will become even slimmer in the coming weeks. Below is a table of the better known companies that will release their earnings this week, with the releases that have the most potential to impact the markets highlighted in green:

 

Abercrombie & Fitch Foot Locker PetSmart
Autozone Greif Progressive
Best Buy H & R Block Revlon
Big Lots Joy Global Smith & Wesson
Costco Wholesale Kate Spade Sotheby’s
Dick’s Sporting Goods Kroger Staples

 

Best Buy is always a company that is closely watched by the markets as it is a good proxy for higher end, consumer facing technology. With Apple having such a strong quarter it would not be surprising to see Best Buy have a very strong quarter as well. Costco is a good proxy company for smaller businesses and restaurants as these markets make up a lot of the Costco business. H&R Block may be followed more closely than normal this quarter as investors wait to hear what, if anything, the company is doing to try to protect customer identities and combat the false tax return scams that seem to be very prevalent this year given all of the problems TurboTax and its parent company Intuit seem to be having.

 

International News: International news last week was pretty quiet given that numerous countries were closed for part of the week due to the lunar New Year, but there were a few interesting developments. First, Greece failed to make any negative headlines and did actually get its list of reforms and other items to the finance ministers and the Troika for approval, which it easily received from all voting members, even Germany. Some people in Greece are not in favor of many items on the list and there was small scale rioting in the streets in parts of Greece, but it was much calmer than it could have been. So with the deal done, does it mean the situation in Greece is resolved? Certainly not. Greece and the Europeans effectively kicked the can down the road for 4 months to allow Greece time to come up with a longer term plan as to how to repay its debts and actually get its economy, or what is left of it, back on track. Once again the Europeans did nothing to fix the underlying causes of the problem in Europe. This week will be an exciting week as it is the first week the ECB will be buying debt as part of its latest bond buying program. While it will likely take several months to see if the program is actually working, it is nice to see the ECB finally put some money where its mouth is and start a program that has been talked about for years. The future of both the recovery and the Eurozone as a whole may very well depend on the successful outcome of the bond buying program. One other area of the world that made a few headlines last week that I have not recently addressed was China.

 

While Europe has been doing a lot of recent soul searching, so too has China with its still relatively new government running a number of interesting programs, such as trying to stop the shadow banking system in China, root out corruption and keep its economy growing at a much faster than normal pace. The latest move out of China is the decision to lower interest rates by having the People’s Bank of China (PBOC) cut interest rates. The rates were cut to fend off deflation, but there is no deflation in the numbers China prints to speak of. Even the PBOC report released at the same time as the rate cut said that inflation will likely be 1.2 percent during 2015, which is well below the target of 3.5 percent, but still a far cry from deflation (a negative rate). Growth, projected by the PBOC is also expected to slow during the first quarter of 2015 down to an annualized rate of 7 percent from 7.3 percent. Most countries in the world can only dream of growing at 7 percent, but in China 7 percent is a sign of weakness and a major problem. More information will be coming out this week about China as the National People’s Congress holds its annual meeting on Thursday and will likely include an outline of growth targets for 2015 and the next few years as well. All of these numbers have to be taken with a large grain of salt as China is notorious for having target numbers and hitting them at all cost, even if there are large gaps that are fraudulently filled in after the fact.

 

Market Statistics:

Index Change Volume
NASDAQ 0.15% Average
Dow -0.04% Average
S&P 500 -0.27% Average

 

The NASDAQ was the only index of the three major indexes to make it four weeks in a row of gains last week after both the S&P 500 and the Dow posted declines last week. Last week was a lackluster week for the financial markets as there was little information to react to and even fewer logical reasons to move.

 

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

 

Top 5 Sectors Change Bottom 5 Sectors Change
Healthcare Providers 1.65% Energy -1.69%
Semiconductors 1.01% Oil & Gas Exploration -1.66%
Consumer Staples 0.85% Natural Resources 1.53%
Technology 0.78% Aerospace & Defense -1.22%
Global Real Estate 0.72% Transportation -1.05%

Healthcare continued to ride high last week as did Semiconductors, two sectors of the markets that have been performing very well over the past few months. The interesting sector that made it on the positive list last week was the Consumer Staples sector as it is typically a very defensive sector and is rarely in the top 5 performance sectors unless there is a large decline occurring in the markets overall. Energy continues to be the bottom performing sector, as it is nearly every week that oil decides to slide off for one reason or another.

Fixed income was up last week as the world seemed to react to the Greek deal with a healthy bit of skepticism:

Fixed Income Change
Long (20+ years) 2.36%
Middle (7-10 years) 0.98%
Short (less than 1 year) 0.00%
TIPS 1.48%

Last week the US dollar increased in value by 0.04 percent against a basket of international currencies, making it two weeks in a row of gains. The strongest of the major global currencies last week was the British Pound as it gained 0.18 percent against the US dollar. The weakest of the major global currencies last week was the Japanese Yen as it fell by 0.20 percent against the value of the US dollar. Currency trading was much lighter than usual last week as a number of countries were closed for several days last week in observance of the lunar New Year.

Commodities and metals were mixed last week as oil moved lower and almost all of the other commodities advanced:

Metals Change Commodities Change
Gold 0.76% Oil -2.54%
Silver 2.12% Livestock 1.83%
Copper 3.64% Grains 0.77%
Agriculture -0.35%

The overall Goldman Sachs Commodity Index turned in a gain of 0.72 percent last week. The gains experienced in nearly everything other than Energy were enough to offset the declines that once again occurred on Oil. After falling below the psychological $50 per barrel level back in the beginning of January, oil managed to break back above $50 during mid January, but has once again fallen below $50. All of this price movement in oil has wreaked havoc on the prices being paid at the pump for gasoline, but the prices paid are not equal across the country. According to the latest AAA Fuel gauge report, CA is currently paying more than $3.50 per gallon, while Utah is paying only $2.05 per gallon. The disparity in pricing has a lot to do with the regional refineries that have seen everything from striking workers to being out of commission due to seasonal repairs and maintenance. In short, the price paid at the pump has a lot more built into the price calculation than just the price of a barrel of oil. While Oil was down last week all of the metals increased in value and did so in a meaningful way on both Silver and Copper as demand picked up for both metals over the previous week.

On the international front Germany saw the best performance of the week with the Frankfurt based DAX gaining 3.18 percent as Germany looks like it will pull out of its economic funk, despite having to prop up the majority of the rest of Europe economically. Russia was in the dog house once again this week as the MSCI Russia Capped Index declined by 1.16 percent, thanks in large part to uncertainty going forward about the cease-fire that has now been in place, for the most part, during the past three weeks.  Russia cannot seem to catch a break as it has been either the top or bottom performing index of the major global indexes almost every week.

The VIX made it two weeks in a row of moving less than 10 percent on a weekly basis, last week declining by 6.71 percent. As the markets are meandering, as mentioned above, so too is the VIX as investors’ perceptions of fear seem to ebb and flow with the daily news cycle. The market seems to be taking the downward revision in the forward guidance of corporate America in stride, something that is a little unusual. If we see a lot of numbers coming in worse than expected during the next quarter’s earnings season we could see the VIX jump higher, but right now it seems to be perfectly content ignoring the concerns of the markets until they come home to roost. At the current level of 13.34, the VIX is implying a move of 3.85 percent over the course of the next 30 days. As always, the direction of the move is unknown. This VIX is now at the lowest level we have seen so far during 2015 and looks to be headed lower.

For the trading week ending on 2/27/2015, returns in FSI’s hypothetical models* (net of a 1% annual management fee) were as follows:

Last Week Year to Date
Aggressive Model -0.18 % 2.89 %
Aggressive Benchmark 0.27 % 3.32 %
Growth Model -0.09 % 2.16 %
Growth Benchmark 0.21 % 2.60 %
Moderate Model 0.06 % 1.46 %
Moderate Benchmark 0.15 % 1.87 %
Income Model 0.21 % 1.14 %
Income Benchmark 0.07 % 0.95 %

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

 

We made no changes to our models over the course of the previous week. We still maintain a little cash from the sale of our real estate holding two weeks ago. We still have only a partial position in healthcare and would like to fill the position, but not at the current prices. Energy also continues to look intriguing, but much like healthcare the current prices still look a little high given the uncertainty over future demand, but there are a few individual names in the energy space that I am currently taking a very hard look at.

 

Economic News:  Last week was a busy week for economic news releases as we ended the month of February. There was one release that significantly beat expectations, highlighted below in green, and three releases that significantly missed market expectations, highlighted in red below:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Neutral 2/23/2015 Existing Home Sales January 2015 4.82M 4.95M
Neutral 2/24/2015 Case-Shiller 20-city Index December 2015 4.50% 4.30%
Negative 2/24/2015 Consumer Confidence February 2015 96.4 99.6
Neutral 2/25/2015 New Home Sales January 2015 481K 470K
Neutral 2/26/2015 Initial Claims Previous Week 313K 290K
Neutral 2/26/2015 Continuing Claims Previous Week 2401K 2400K
Slightly Positive 2/26/2015 CPI January 2015 -0.70% -0.60%
Neutral 2/26/2015 Core CPI January 2015 0.20% 0.10%
Positive 2/26/2015 Durable Orders January 2015 2.80% 1.70%
Neutral 2/26/2015 Durable Goods -ex transportation January 2015 0.30% 0.50%
Negative 2/27/2015 GDP – Second Estimate Q4 2014 2.20% 2.10%
Negative 2/27/2015 Chicago PMI February 2015 45.8 58
Slightly Positive 2/27/2015 University of Michigan Consumer Sentiment February 2015 95.4 94
Neutral 2/27/2015 Pending Home Sales January 2015 1.70% 2.40%

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

 

Last week started off on Monday with the release of the existing home sales figure for the month of January, which came in very close to expectations and gave little insight into the current state of the US housing market. On Tuesday more housing data was released, as well as the consumer confidence figure for the month of February, as measured by the US government. The Case-Shiller 20 City Home Price Index showed an annual gain from December to December of 4.5 percent, which was slightly above the expected 4.3 percent, but well below the high single digit rate many home owners have been accustomed to their homes appreciating by. The consumer confidence figure released Tuesday missed expectations in a pretty big way, falling from the January high of 103.8 all of the way down to 96.4. The reasons for the decline seemed to be pretty broad, but uncertainty about the housing market and interest rates did show up in the data. On Wednesday New Home Sales figures for the month of January were released, but they were lackluster as they beat expectations by just a small amount. On Wednesday the standard weekly unemployment related figures were released with both figures coming in higher than expected, but not high enough to cause alarm. Also released on Wednesday was the latest Durable Goods Orders data for the month of January, which handedly beat market expectations, coming in at 2.8 percent versus expectations of 1.7 percent. Much of the strong performance in orders was in the transportation sector; cars in particular had a great month. On Friday the second estimate of fourth quarter GDP was released and the number was revised down from the initial estimate of 2.6 percent to 2.2 percent. This slowing in growth is going to make it pretty hard to see how 2015 is going to hit the projected growth rate, unless something miraculous happens during the first half of 2015. The weather alone is a cause for concern as various regions of the country have been much less productive during the first quarter than they otherwise would have been, such as in Boston with the 8 feet of snow they have been dealing with. The Chicago area PMI for the month of February also showed a large decline during the month, giving yet another sign that the economy may not be as strong as everyone had been thinking. Wrapping up the week on Friday was the release of the University of Michigan’s Consumer Sentiment Index for the month of February, which saw sentiment fall off at the end of the month as prices at the pumps in particular seems to have hit consumer sentiment.

 

This is a busy week for economic news releases, in terms of the number of releases set to be released, as we start March and have all of the final releases for February being released. The releases highlighted below have the potential to move the overall markets on the day they are released as the markets seem to be trading with a very event/news driven mentality:

 

Date Release Release Range Market Expectation
3/2/2015 Personal Income January 2015 0.40%
3/2/2015 Personal Spending January 2015 -0.10%
3/2/2015 ISM Index February 2015 53
3/4/2015 ADP Employment Change February 2015 220K
3/4/2015 ISM Services February 2015 56.5
3/5/2015 Challenger Job Cuts February 2015
3/5/2015 Initial Claims Previous Week 295K
3/5/2015 Continuing Claims Previous Week 2404K
3/5/2015 Factory Orders January 2015 0.60%
3/6/2015 Nonfarm Payrolls February 2015 240K
3/6/2015 Nonfarm Private Payrolls February 2015 230K
3/6/2015 Unemployment Rate February 2015 5.60%
3/6/2015 Consumer Credit January 2015 $14.0B

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

 

This week starts on Monday with the release of personal income and spending for the month of January, which are not expected to show much change over the levels seen in December. The markets will likely be watching the overall ISM index much more closely than the income and spending figures as this number could see a large downward revision due to the inclement weather on the east coast. On Wednesday the first of the employment related figures for the month of February is set to be released with the ADP employment change figure for the month. Expectations are pretty low for this reading at 220,000 jobs having been created during the month. If this release significantly misses or beats expectations it could influence how the rest of the employment related releases of the week are looked at by the markets. Later during the day on Wednesday the Services side of the ISM is set to be released and will likely move in the same direction and at roughly the same magnitude as the overall ISM released on Monday, thus it will likely not be a market moving release. On Thursday three more jobs related figures are set to be released, those being the challenger job cuts figure for February as well as the standard weekly employment related figures. None of the releases really have the potential to move the overall markets as they are much less important than the jobs figures released the following day. Wrapping up the day on Thursday is the factory order data for the month of February, which is expected to show that orders increased by 0.6 percent. This seems like a very high target and it would not be surprising to see this figure actually come in negative, with the weather being the culprit for the miss. On Friday the big releases of the week that everyone will have been waiting for are released, those being the official unemployment rate in the US as measured by the government and the payroll numbers, all three for the month of February. The overall unemployment rate is expected to decline from 5.7 percent down to 5.6 percent, while public payrolls are expected to decline and private payrolls are expected to pick up. The participation rate, also released in the unemployment report, will be closely watched. Overall, we will likely see one or two of the releases beat expectations, while the others will likely miss, thus having an offsetting impact on the markets. This week wraps up on Friday with the release of the consumer credit report for the month of January, which is expected to show an increase in credit of $14 billion during the month, as interest rates on loans remain near historically low levels.

 

Fun fact of the week—Department of Home Land Security

 

In 2003 the United States Coast Guard was officially transferred to the Department of Homeland Security, being transferred from the Department of Transportation, which it had been under since 1967.

Source: United States Coast Guard http://www.uscg.mil/top/missions/

For a PDF version of the below commentary please click here Weekly Letter 2-23-2015

Commentary at a glance:

-Markets moved tepidly higher on low volume despite uncertainty.

-Earnings season is now in the home stretch and looking pretty good for now.

-A last minute Greek deal has been made, but items are still needed to secure it.

-Russia seems to be abiding with the terms of the cease fire—about a week late.

-Manufacturing data seems to be slowing on the east coast; the weather is being blamed.

 

Market Wrap-Up: Little changed from a technical standpoint last week as the NASDAQ remains very strong, while the S&P 500 follows and the Dow seems to be content just barely hanging on to its most recent trading channel. All the while, the VIX continues to pursue lower levels. The charts below are of the three major US indexes in green with their respective trading channels being 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 with the red line:

4 charts 2-23-15

Technology continued to fly high last week as the NASDAQ advanced at a faster pace than the other two major US indexes, now pushing ever closer to the all time high level for the index seen back in early 2000 just prior to the technology bubble bursting. If the NASDAQ continues on the current rate of change we have seen over the past two weeks we could see a new all time high on the index either at the very end of this week or early next week. How good it must feel for investors who actually stuck with the NASDAQ through thick and thin to now, 15 years later, finally to be made whole from their losses. Both the Dow and the S&P 500 have recently been making many new all time highs as well, highs of their respective 2000 levels back in 2007, just before the decline of 2008. Oil continues to be a major driving force behind the recent performance of the three major indexes, as does the lack of exposure to international markets. The NASDAQ is perhaps the least oil and US dollar fluctuation dependant index of the three major indexes, so when oil goes down it is the least exposed. The Dow has a significant weighting to oil, having both Exxon and Chevron as component companies. Additionally, nearly all component companies in the Dow have significant revenues coming from outside of the US and thus are hurt by the strong US dollar. The S&P 500 has about 30 percent of its earnings coming from the energy sector, not to mention a large number of component companies deriving significant amounts of revenue from abroad.  This make up of the indexes alone may largely explain the recent deviations in performance. If the above is true and holds true, we could be in for a long period of time when the NASDAQ out performs the other two major indexes. While all of this movement was occurring in the equity markets, the VIX was slowly meandering lower, seemingly minding its own business. On Friday the VIX hit the lowest level we have seen so far during 2015, during a week with very low volatility on the VIX; more on this below in the markets statistics section.

 

National News: National news last week focused on fourth quarter earnings season as there was little work being done in Washington DC thanks to a holiday and snow storm that shut down the US Federal Government. While the government may have been taking it slow, earnings results certainly were not. Last week was a very busy week for earnings releases as there were many household names that released earnings with a very wide mix of positive and negative results being shown. 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:

 

Agilent Technologies 0% Hyatt Hotels 0% Nordstrom -2%
Avis Budget Group 28% Iron Mountain -19% Owens & Minor -4%
Barnes Group 2% Jack In The Box 7% Parker Drilling 50%
Bloomin’ Brands 4% La-Z-Boy -13% Public Storage 0%
Deere & Co 35% Marathon Oil -533% Teekay 54%
Denny’s 0% Marriott 5% T-Mobile 33%
EchoStar 55% Medtronic 4% Trulia pushed
Flowserve 3% MGM Resorts -83% Vornado Realty -1%
Genuine Parts 0% Noble Energy 9% Wal-Mart Stores 5%
Goodyear Tire & Rubber 2% Noodles & Co -7% Wolverine World Wide 0%

 

Some of the largest surprises of the week last week in earnings were among the energy related companies and the surprises were both good and bad. Marathon Oil missed by the largest percentage, but this is somewhat misleading as the expected number for earnings per share for the company was $0.03 and they actually turned in a loss of $0.13 per share. So while the percentage may be very large, the actual dollar difference is small. On the flip side, Parker Drilling beat expectations by 50% thanks to quick reactions to the falling oil prices and long term contracts for their rigs; the falling price of oil is not a detriment to all energy related companies. Wal-Mart was the other big announcement last week as the company beat expectations by 5 percent on an earnings per share basis, while revenues came in slightly lower than expectations. This beat by Wal-Mart shows that the discount retailers have been having an easier time than the higher end stores such as Nordstrom or La-Z-Boy, both of which missed their market expectations last week.

 

According to Factset Research, we have now seen 443 (89 percent) of the S&P 500 companies release their results for the fourth quarter of 2014. Of the 443 that have released, 75 percent of them have met or beaten earnings estimates (this is down 2 percent from two weeks ago), while 25 percent have fallen short of expectations. When looking at revenue of the companies that have reported, 58 percent of the companies have beaten estimates (this number is unchanged from two weeks ago), while 42 percent have fallen short. The major driving sectors behind the strong earnings announcements have been telecommunications and healthcare, while the laggard has not surprisingly been energy. Energy earnings will be spoken about frequently in the coming weeks and months as they seem to be almost all of the reason for the decline in forward earnings expectations on the S&P 500 since they made up as much as 30 percent of total earnings for the S&P 500 prior the decline in oil prices. Forward looking guidance continues to be a major issue for many companies, which are citing a multitude of potential reasons for slower future growth, everything from Europe to Dollar strength, the US Fed policy or the declining price of oil. For whatever reason, the expectations of future earnings are being set very low. In the past this has made it much easier for companies to look like they are performing better than they really are, as hopping over a low bar is much easier than a high one; we will just have to wait and see if this is the case this time around. At this point in the earnings cycle it would take a lot of companies announcing earnings that deviate widely from expectations to change the above mentioned numbers pertaining to the number of companies beating or falling short of both earnings and revenues for the fourth quarter of 2014.

 

The focus of this week’s earnings releases will be the retail sales industry as many companies that sell items directly to the US consumers will be releasing earnings. Below is a table of the better known companies that will release their earnings this week, with the releases that have the most potential to impact the markets highlighted in green:

 

3D Systems Domino’s Pizza Ross Stores
Alleghany Gap Salesforce.com
Aqua America Hewlett-Packard Sanderson Farms
Babcock & Wilcox Home Depot Sears Holdings
Big 5 Sporting Goods J C Penney SeaWorld Entertainment
Campbell Soup Kate Spade & Co South Jersey Industries
Comcast Kohl’s Sturm Ruger & Co
Cooper Tire & Rubber Liberty Media Target
Crocs Lowe’s Companies TJX Companies
Dillard’s Macy’s Toll Brothers
DISH Network Papa John’s International Vitamin Shoppe
Dollar Tree Pinnacle Foods WebMD Health

 

After Wal-Mart easily beat expectations last week, the bar has been set a little higher for the other major retailers announcing earnings this week, companies such as Target, Sears and Kohl’s. Deep discount retailers such as Dollar Tree and Ross will also be closely watched to see if any of the money saved on gasoline trickles into their stores. Looking at the higher end of the US consumer, Gap and Toll Brother both release their earnings for the fourth quarter this week and it will be interesting to see if they have seen any change in their businesses due to the falling price of oil.

 

International News: International news last week focused on the same two problems it has been focusing on now for a month: the situation in Ukraine and the tenuous situation in Greece. The situation in Ukraine has been very unsettling over the past week as fighting in and around a few key towns continued, despite the cease-fire that was officially agreed to more than 1 week ago. One town that saw heavy fighting was Debaltseve, a key hub for rail traffic in Eastern Ukraine. At the time of the signing of the cease-fire the Russian-backed Rebels did not have control of the town, so they kept fighting and asking the Ukrainian soldiers surrender. After being shelled for days after the cease-fire the city finally fell to the rebels late last week. This same type of action occurred at several other cities as well last week, eventually giving way to the peace deal now being more fully implemented with a prisoner exchange having taken place as well as a small amount of heavy weaponry being moved back from the front line by both sides. The global financial markets will likely cheer the peace if it holds in the region, as this is one of the major unknowns on the geopolitical landscape that has been adversely affecting the financial markets. The other development last week was in Greece, one that may have kicked the can down the road just a little ways.

 

Greece has been quickly cruising toward the edge of a financial cliff ever since the new government was seated in Greece earlier this year. The new government ran on an anti-austerity and anti-bailout funds platform, both of which now look like campaign promises that cannot be kept. Late last week Greece’s Finance Minster announced that a deal had been made with the European creditors to extend Greece a temporary four month loan, to buy the country time to figure out how it will extract itself from the current situation. The Greeks had initially asked for 6 months, with no strings attached, but Germany quickly smashed this idea with a flat “no” answer. Greece ended up with a deal for four months that includes a list of reforms that Greece will take over the four months to comply with the lenders’ demand. The “list of reforms” has to be drawn up and presented to the international creditors by the end of today, 2/23/15. If the list is not drawn up to the satisfaction of the creditors, the deal will be scrapped all together and Greece will likely find itself once again trying to scramble to secure funding by the end of this month or else risk defaulting and potentially finding itself without the Euro. So what was actually accomplished in the latest deal? Almost nothing is the short answer. While a looming default would be moved from this month to the end of June there has been almost no work to fix the actual problem, like Greece’s debt to GDP being more than 175 percent. It was almost comical last week to hear the Greek government officials try to spin the deal as a victory for them and yet it is not even a done deal at this point. We will just have to wait and see what comes of the “list of reforms” to see if the party comes to an end in Greece quickly or slowly.

 

Market Statistics:

Index Change Volume
NASDAQ 1.27% Below Average
Dow 0.67% Below Average
S&P 500 0.63% Below Average

 

The three major indexes in the US have now advanced three weeks in a row. Overall last week the volume was below average, but nearly all of this can be explained by Monday being a holiday and the US markets being closed for the day. The reasons for the move last week on the three major indexes remain unclear. Earnings announcements, peace in Ukraine and a potential Greek debt deal all potentially played a part in the increase last week. Going forward, earnings season will likely drive the markets as will speculation about the future move of the US Federal Reserve.

 

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 4.01% Energy -2.17%
Aerospace & Defense 3.12% Natural Resources -1.65%
Pharmaceuticals 2.51% Oil & Gas Exploration -1.35%
Industrials 2.20% Telecommunications -0.68%
Healthcare 2.11% Regional Banks -0.52%

With the NASDAQ seeing such strong performance it was not surprising to see that two of the top three sectors in terms of performance last week are heavily listed on the NASDAQ. The Aerospace and Defense sector saw strong performance last week as it looks like the situation in the Middle East with ISIS will be very long and drawn out. Add in uncertainty over the situation in Russia and China and you can easily see why investors think the sector could be seeing a lot more demand in the coming years. On the flip side, energy and oil in particular had a rough time last week as the rally of the past three weeks came to an end last week as oil moved lower.

Fixed income was mixed last week as investors weigh the new deal over Greek debt and the potential impact it will have on the rest of Europe and, in particular, on the ECB’s bond buying program:

Fixed Income Change
Long (20+ years) -1.29%
Middle (7-10 years) -0.54%
Short (less than 1 year) 0.01%
TIPS -0.16%

Last week the US dollar increased in value by 0.20 percent against a basket of international currencies, ending three weeks of declines. The strongest of the major global currencies last week was the Australian Dollar as it gained 1.07 percent against the US dollar. This was a major change of direction for the Australian Dollar as it has been in a free fall since early September as the price of many global natural resources fell. The weakest of the major global currencies last week was the Swiss Franc for the second week in a row as it fell by 0.62 percent against the value of the US dollar. Surprisingly, last week the Euro lost 0.11 percent against the value of the US dollar, despite there being the announcement of a potential deal between Greece and its creditors. Maybe this is a sign that the deal may fall apart at the last minute or that it really is just kicking the can down the road four months.

Commodities and metals all moved lower last week as oil reversed its recent trend and pushed lower:

Metals Change Commodities Change
Gold -2.29% Oil -3.73%
Silver -6.05% Livestock -1.57%
Copper -0.16% Grains -1.17%
Agriculture -1.78%

The overall Goldman Sachs Commodity Index turned in a loss of 2.17 percent last week. Much of the decline in the overall commodities market can be attributed the fall in oil last week, which slid by almost 4 percent as renewed downward pressure seems to be taking hold. Even the safe haven assets such as precious metals were not spared last week as Gold fell by more than 2 percent and Silver sold off more than 6 percent. Agriculture had a rough week as well last week with everything from grains to live cattle and lean hogs declining in value.

On the international front Japan saw the best performance of the week with the Tokyo based Nikkei gaining 2.34 percent, as exporters continue to perform very well thanks in large part to the weakness seen in the Yen over the past few months. This quarter’s earnings from Japanese companies has shown a dramatic increase in demand for exported goods, while imported goods have fallen as they are more expensive than they used to be for Japanese consumers. The only declining index of the major global indexes last week was in Canada and was the Toronto Stock Exchange, which fell by 0.61 percent thanks to the falling prices of oil and the precious metals. It is unlikely that we will see any of the major Chinese indexes make it into either the top or bottom spot this week as the markets are closed for the lunar new year for several days, both last week and this week.

The VIX had a very boring week. It not only moved down by 2.65 percent over the course of the week, but it also did not have any intraday changes greater than 14 percent, something that is pretty rare given the market environment the VIX has experienced over the past few months. I was a little surprised to not see more of a reaction to the announcement of the deal in Greece. I was expecting the VIX to move noticeably lower on the announcement, but that turned out not to be the case.  At the current level of 14.30 the VIX is implying a move of 4.13 percent over the course of the next 30 days. As always, the direction of the move is unknown. This VIX is now at the lowest level we have seen so far during 2015 and looks to be headed lower.

For the shortened trading week ending on 2/20/2015, returns in FSI’s hypothetical models* (net of a 1% annual management fee) were as follows:

Last Week Year to Date
Aggressive Model 0.97 % 3.07 %
Aggressive Benchmark 0.71 % 3.03 %
Growth Model 0.81 % 2.26 %
Growth Benchmark 0.56 % 2.38 %
Moderate Model 0.65 % 1.40 %
Moderate Benchmark 0.40 % 1.72 %
Income Model 0.55 % 0.93 %
Income Benchmark 0.21 % 0.88 %

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

 

We made two changes in our models over the course of the previous week: one purchase and one sell. The purchase made last week was in the Healthcare sector and was the Rydex Healthcare mutual fund (ticker RYHIX). We took an initial position in the fund utilizing the cash we had on hand. We intend to add to this position in the future in either one or two more steps until we have a full position in the fund. Our sell last week was in real estate as we sold our holding of the Schwab Real Estate ETF (ticker SCHH). Real Estate looks as if it has started to turn over as the trade appears to be linked to the 10-year US government bond yield. This makes a lot of sense because many refinancing and home mortgages rely on the 10-year yield, so if the yield on the 10-year is increasing, then so too are mortgage rates, thus slowing real estate demand. We held the position on the thought that yields may decrease over fears that Greece may be in for more trouble, but with last week’s actions effectively kicking the can down the road it looks like the real estate trade in the US could struggle for a few more months. We allocated the proceeds from the sale of SCHH to cash for the time being and are actively looking to allocate the funds when appropriate. Healthcare, Biotechnology and Pharmaceuticals still look like the most interesting sectors of the market currently.

 

Economic News:  Last week was a slow week for economic news releases as it was a middle of the month week that also included a holiday. There was one release that significantly missed market expectations, highlighted in red, and no releases that significantly beat market expectations:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Slightly Negative 2/17/2015 Empire Manufacturing February 2015 7.8 9
Neutral 2/18/2015 Housing Starts January 2015 1065K 1070K
Neutral 2/18/2015 Building Permits January 2015 1053K 1065K
Neutral 2/18/2015 PPI January 2015 -0.80% -0.40%
Neutral 2/18/2015 Core PPI January 2015 -0.10% 0.10%
Neutral 2/18/2015 FOMC Minutes Previous Meeting
Neutral 2/19/2015 Initial Claims Previous Week 283K 295K
Neutral 2/19/2015 Continuing Claims Previous Week 2425K 2385K
Negative 2/19/2015 Philadelphia Fed February 2015 5.2 8.5

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

 

Last week started off on Tuesday with the release of the Empire Manufacturing index, which showed that while manufacturing in the greater New York region picked up during February, it did so at a slightly slower pace than was first expected. On Wednesday two housing figures were released with both coming in close to, but under, market expectations, leading to little reaction by the markets. Also released on Wednesday was the Producer Price Index (PPI), which indicated that prices at the producer level declined by 0.8 percent during January, thanks in large part to a continued fall in the price of oil and energy. Released mid day on Wednesday was the FOMC meeting minutes from the last meeting, but they held little if any new information as it looks like the Fed is content on waiting to increase interest rates until there is some more clarity on a number of various topics. On Thursday the standard weekly unemployment related figures were released with initial claims slightly beating market expectations, while continuing claims slightly missed expectations, thus causing the two releases to have an offsetting effect on each other. Wrapping up the week on Thursday last week was the sole truly negative release of the week as the Philadelphia Fed released its index for the month of February, which showed that business is slowing down in the greater Philly region, thanks in part to adverse weather, which has been hampering the region now for almost the entire month.

 

This is a busy week for economic news releases in terms of the number of releases set to be released. The releases highlighted below have the potential to move the overall markets on the day they are released as the markets seem to be trading with a very event/news driven mentality:

 

Date Release Release Range Market Expectation
2/23/2015 Existing Home Sales January 2015 4.95M
2/24/2015 Case-Shiller 20-city Index December 2015 4.30%
2/24/2015 Consumer Confidence February 2015 99.6
2/25/2015 New Home Sales January 2015 470K
2/26/2015 Initial Claims Previous Week 290K
2/26/2015 Continuing Claims Previous Week 2400K
2/26/2015 CPI January 2015 -0.60%
2/26/2015 Core CPI January 2015 0.10%
2/26/2015 Durable Orders January 2015 1.70%
2/26/2015 Durable Goods -ex transportation January 2015 0.50%
2/27/2015 GDP – Second Estimate Q4 2014 2.10%
2/27/2015 Chicago PMI February 2015 58
2/27/2015 University of Michigan Consumer Sentiment February 2015 94
2/27/2015 Pending Home Sales January 2015 2.40%

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

 

This week starts on Monday with the release of the existing home sales figure for the month of January, which is expected to show a reading of just under 5 million homes being sold during the month. With the US housing market softening a little on the increased rates, some positive data on this release to start the week that has several key housing related releases could go a long way. On Tuesday the Case-Shiller 20 City Home Price index is set to be released with expectations of a small increase of 4.3 percent during the month of December. This data is so stale that it would take a very wide deviation from expectations for this release to move the markets. However, released later during the day on Tuesday is the Consumer Confidence Index for the month of February and this release could have a noticeable impact on the overall markets if is misses expectations, and the expectations look pretty high by my estimation. On Wednesday the release of the day is the new home sales figure for the month of January, which is expected to show something just under 500,000 units, the highest level since late 2008 as the US economy was heading into the recession. If this number comes to fruition it could be seen as a very positive development for the overall US economy. On Thursday the standard weekly unemployment related figures are set to be released with expectations of little change over the previous level. Later during the day on Thursday the Consumer Price Index (CPI) is set to be released with expectations that prices will be shown to have declined by 0.6 percent during January, thanks entirely to the falling price of oil and in turn energy. Core consumer prices (prices excluding food, fuel and energy) are expected to have increased slightly during the month. Also released on Thursday is perhaps one of the most important releases of the week, that being the Durable Goods Orders figure for the month of January, which is expected to show a gain of 1.7 percent overall and 0.5 percent when transportation is removed from the calculation. These two releases need to be strong this week or it could really spook the markets. Consumer confidence has been increasing during the recent months, but the spending has not shown the same, meaning consumers are confidently holding cash. We need to get the US consumer spending again in order to get the US economy growing at a faster pace than it currently is doing. On Friday we will get a reading of just how well the US economy is growing as the second version for the fourth quarter GDP figure is set to be released. Expectations are for a reading of 2.1 percent down from the first estimate of 2.6 percent. Anything under 2 percent could cause a problem for the markets while any upside surprises over 2.6 percent could be taken as very positive. Wrapping up the week on Friday is the release of the University of Michigan’s Consumer Sentiment Index for the month of February, which is expected to show a very small increase from the first expectations of 93.6 for the month. Perhaps more important than all of the releases this week is the testimony of Federal Reserve Chair Yellen as she testifies before the Joint Economic Committee in Congress, during which she will read a prepared statement and then take questions at length from members of Congress. The markets will be watching her testimony very closely for signals as to when and by how much interest rates may start to increase and it could really move the markets.

 

Fun fact of the week—The Oscars, what is a trophy really worth?

 

The value of the raw materials in each Oscar is around $900. Although they shine golden, and are clad in a hefty coat of 24-carat gold, at their core an Oscar is made of a variant of pewter – a special alloy called britannium made especially for Oscar figures.

Source: The Daily Mail http://www.dailymail.co.uk

For a PDF version of the below commentary please click here Weekly Letter 2-17-2015

Commentary at a glance:

-Markets rallied around the world on the heels of positive geopolitical developments.

-Greece and Ukraine—problems solved?

-Earnings season is now more than three quarters behind us and still looking strong.

-Poor retail sales figures for January continue to cause concerns about the US economy.

 

Market Wrap-Up: Breakout! Last week the NASDAQ managed to breakout to the upside of its channel, a level of technical resistance that had been in place for more than three months. The index has now moved to within 110 points of breaking above the 5,000 level, something that has not been done since the year 2000. The charts below are of the three major US indexes in green with their respective trading channels 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 with the red line:

4 charts 2-17-15

As you can see in the above charts, all three of the major US indexes moved nicely higher last week as progress was made in several of the key geopolitical hotspots around the world. In terms of technical strength, the NASDAQ is now far and away the strongest of the three major indexes as it broke and closed above its most recent resistance level. While the technicals for the S&P 500 and the Dow were not nearly as exciting as the NASDAQ, both indexes also turned in a good week. The S&P 500 managed to break back into its most recent trading channel and move up toward the middle of the channel, making the index the second strongest of the three. The Dow was the laggard, as you would expect in a week that saw such a “risk on” trade occur, but even the Dow had a positive development. The Dow last week managed to move back into its most recent trading channel; even if it just barely managed to do so, it still made it. At this point it looks like the markets could be positioned to move higher, but all of their recent moves hinge on two main developments: the bailout situation in Greece and the cease-fire achieved in Russia over the weekend, both of which are looked at more closely in the international news section below. While all of the equity markets were moving higher last week, the VIX, as expected, moved in the opposite direction as investors became less worried about volatility in the markets and more concerned about not being in the markets to participate in the most recent rally. The VIX has now ended its heightened volatility level and is at the lowest point we have seen so far during 2015. It would be nice to see a period in which the VIX does not spike higher, as it has three times this year, but with uncertainty still on the horizon it would not be surprising to see the VIX start to rise yet again. So where could the markets go from here?

 

Most likely the markets will continue to move in a very wide trading range, as there have been very few structural changes in any of the issues that led to the most recent round of volatility. Europe is still not competitive and the strong country or countries, however you look at it, are still carrying the deadweight of smaller, less economically meaningful countries. In Ukraine, the situation looks okay for now, but that does not mean Russian President Putin will not coming roaring back in with guns blazing at the slightest report that “Russian” speaking people need to be saved from the Ukrainian government. Both the S&P 500 and the Dow still have room to move higher and remain in their respective trading ranges. The NASDAQ, however, broke well above its most recent trading range and does not look to be headed back lower, at least for now. Oil will also remain one of the key drivers of market performance over the coming weeks as prices at the pump have been slowly increasing as oil prices on the global markets have also been increasing. It does not look or feel like the volatility is over in this market, but rather that it is just taking a break and consolidating before moving ahead once again. This ebb and flow of investments is exactly the type of market where active investment management helps overall portfolio risk and returns. In a market that is chopping like this one, it is imperative to have something in place to protect yourself on the downside so that you do not give up all of your gains, while at the same time having a strategy that is nimble enough to adjust to changing market environments.

 

National News: National news last week was very slow with many politicians seemingly taking the week off for the upcoming holiday weekend. The biggest piece of news last week aside from earnings season is the fact that the Keystone XL pipeline bill has now passed both the US House of Representatives and the Senate and is now on the President’s desk awaiting either his signature or his veto. The support for the measure was bipartisan with nearly all republicans and a number of democrats voting in favor of the measure. If the President vetoes the bill it will be sent back to Congress where a two-third vote in both the Senate and the House is needed to override the President’s veto. If the bill were to be sent back right now it looks like there would only need to be 4 more votes in the Senate in favor of the measure coming from the democratic side of the aisle to get to the two thirds majority. In the House it looks like it could be a little more of stretch to get the votes to override the veto as 12 more votes are needed to get it passed by a two thirds majority. While it is unlikely to garner the votes it needs to override a veto this time around, it seems something will be created over the next few iterations of the bill that will have enough support behind it to pass the bill. One of the driving factors for passing the bill may be public fear as another train carrying oil derailed and exploded over the weekend. While the horse trading is going on in Washington DC, earnings season continues to roll ahead for the rest of the US and it is shaping up to be a pretty good fourth quarter earnings season.

 

Last week was a very busy week for earnings releases as there were many household names that released earnings with a very wide mix of positive and negative results being shown. Below is a table of the better known companies that released earnings last week with earnings that missed expectations highlighted in red, while earnings that beat expectations by more than 10 percent are highlighted in green:

 

Advance Auto Parts 4% J M Smucker 3% Spirit Airlines 4%
AOL 42% Kellogg -7% Tesla Motors -420%
BorgWarner 0% Kraft Foods 16% Time Warner 4%
Cabela’s -18% Martin Marietta Materials 16% Trulia pushed
Cisco Systems 11% Metlife 1% VF Corp -1%
Coca-Cola 5% Molson Coors Brewing -18% Waste Connections 4%
CVS Health 0% Mondelez International 9% Western Union 24%
Dean Foods -20% Panera Bread 3% Whole Foods Market 2%
Flowers Foods 18% PepsiCo 4% Wisconsin Energy -2%
Groupon 200% Red Robin Burgers -4% Wyndham Worldwide 5%
Hasbro 0% Scripps Networks 9% Zillow -67%

 

According to Factset Research, we have now seen 391 (78 percent) of the S&P 500 companies release their results for the fourth quarter of 2014. Of the 391 that have released, 77 percent have met or beaten earnings estimates (this is down 1 percent from two weeks ago), while 23 percent have fallen short of expectations. When looking at the revenue of the companies that have reported, 58 percent of the companies have beaten estimates (down 1 percent from two weeks ago), while 42 percent have fallen short. As we cross over the three quarters mark on earnings season, we are now almost exactly at the levels seen for the third quarter of 2014 as far as the number of companies beating estimates on both earnings and revenues. One big change this quarter is that the future guidance has been slowly coming down. So far 63 companies have revised their earnings expectations lower for the first quarter of 2015 and only 11 companies have issued positive guidance for Q1 2015. Much of the negative outlooks are coming from the energy sector, but the strong US dollar has also been playing into the numbers for large multinational companies that have to sell goods abroad in foreign currencies.

 

The focus of this week’s earnings releases will be the leisure industry as many of the large hotel chains release their earnings. Below is a table of the better known companies that will releases their earnings this week, with the releases that have the most potential to impact the markets highlighted in green:

 

Agilent Technologies Hyatt Hotels Nordstrom
Avis Budget Group Iron Mountain Owens & Minor
Barnes Group Jack In The Box Parker Drilling
Bloomin’ Brands La-Z-Boy Public Storage
Deere & Co Marathon Oil Teekay
Denny’s Marriott International T-Mobile
EchoStar Medtronic Trulia
Flowserve MGM Resorts Vornado Realty
Genuine Parts Noble Energy Wal-Mart Stores
Goodyear Tire & Rubber Noodles & Co Wolverine World Wide

 

This week will focus on the releases of three very large hotel operators: Hyatt, Marriott and MGM. Consumer spending normally includes a healthy amount of money being spent on leisure activities such as traveling and vacations. With such a global footprint, Hyatt and Marriott are in a unique position to see very early on the spending patterns of a large group of people around the world and to determine if they are spending more or less on leisure and vacations. The release of Wal-Mart earnings is always a big release as Wall Street looks to the retailer for guidance on the whole discount shopper and shopping experience. While many people dislike Wal-Mart, its dominance of the discount retail space in the US is hard to argue with. I am looking for any guidance about an increase in spending that Wal-Mart is seeing due to the declining prices in oil that resulted in savings at the pump. Wal-Mart would be one of the first retailers to see such a change and will likely comment about it in the quarterly release. One other major thing to watch for in the release is the holiday sales figures and how well the retailer did in capturing the very coveted holiday shoppers. If Wal-Mart saw sales declining across the board it could prove to be an early warning sign for the US economy as a whole as we have been seeing very confident consumers choose to hold onto their money rather than spend it.

 

International News: International news last week focused on the same two topics it has been focusing on for the past few months: the situation in Greece and the situation in Ukraine. Greece is inching ever closer to the drop dead date for a deal on its debt, as a major payment is due in a few short weeks and Greece does not currently have the funds to make the payment without receiving further bailout funds. These would be the same bailout funds Greece has said in the past it will refuse to take. Last week there was a meeting of the finance ministers of Europe at which they were supposed to agree to either save Greece or let it go; in the end there were no major announcements out of the meeting. Germany is still pounding the table, not wanting to make any changes to existing debts or austerity programs for Greece. As the paymaster for Europe its voice has to be listened too. The odds are now up to 50/50 as to whether Greece will be forced off the Euro and default on its debt in the next 6 months. This is a massive change from the almost zero chance of said actions just a few short months ago. It seems there are still a few chapters in this story that need to be written before we know the actual outcome of the situation. The other situation that made headlines last week and affected the global financial markets was the situation in Ukraine.

 

Yet another cease-fire has been agreed to between Russia, the rebels and the Ukrainian government. This cease-fire is much like the one agreed to back in October and has many of the same points, but for some reason people think this one may actually work. The proposal draws up a demilitarization zone and calls for the withdrawal of troops by both sides from the zone. It also calls for the eastern region to be more autonomous from the government in Kiev and calls for the withdrawal on both sides of the heavy weaponry that is currently being used. It seems odd, however, that Russia would back down to international demands at this point and give in on the situation in Ukraine. The price of oil has been moving higher over the past few weeks and the rebels/Russians have been making pretty significant strides into eastern Ukraine. To fight all this time and then just pack up and go back home does not seem like something Russian President Putin would do, especially with the amount of public support he has received for taking the actions in Ukraine. This is more likely just a stall tactic by Russia or an attempt to get the Ukrainian military to withdraw slightly so that it is easier for the Russians to take new land. Also, while the cease-fire is technically in place there has still been a lot of fighting around a few key cities that are transportation hubs for all of eastern Ukraine—so it is not as peaceful as some may think a cease-fire should be.

 

Market Statistics:

Index Change Volume
NASDAQ 3.15% Average
S&P 500 2.02% Average
Dow 1.09% Average

 

The three major indexes in the US have advanced two weeks in a row. Much of the advance seems to be on optimism on both a Greek debt deal materializing and the belief that the ceasefire between Ukraine and Russia may hold. The movements in the markets last week seemed to indicate that investors were more willing to take on investment risk than they have been over the past few months. This is primarily seen in the drastic outperformance of the NASDAQ versus the other two indexes and in the outperformance of the S&P 500 over the Dow. The standard risk scale for the three major indexes is that the NASDAQ is the most risky, while the S&P 500 is in the middle and the Dow is the least risky index of the three. During a “risk on” trading week you will see performance of the three major indexes in the order seen last week; during a “risk off” trading week the opposite would be true with the Dow seeing the best performance, followed by the S&P 500 and then the NASDAQ. Overall last week the volume was at the average level seen on each of the indexes, which tells me there were no major shifts in asset allocations by large institutional investors.

 

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

 

Top 5 Sectors Change Bottom 5 Sectors Change
Semiconductors 5.00% Utilities -2.99%
Technology 4.64% Real Estate 0.19%
Software 3.78% Infrastructure 0.40%
Materials 3.39% Consumer Staples 0.83%
Oil & Gas Exploration 3.21% Telecommunications 0.93%

With the NASDAQ seeing such strong performance it was not surprising to see that the top three sectors of the markets last week were all technology related. Semiconductors is typically one of the most volatile sectors of the markets, but Semiconductors is also the sector that reacts the most positively when the markets are moving higher. One sector that was curiously missing last week in the positive column was Biotechnology, which saw average performance last week, gaining only 2.49 percent for one reason or another. On the downside for the sectors last week, Utilities led the way lower for the second week in a row, giving up almost 3 percent as investors seemed to be favoring more risky investment options. Utilities was the only sector that saw a decline last week as the rest of the major sectors of the markets turned in positive performance.

Fixed income moved lower last week as investors continued to seem willing to step out of the safety of US fixed income investments and into other investment opportunities:

Fixed Income Change
Long (20+ years) -2.12%
Middle (7-10 years) -0.63%
Short (less than 1 year) 0.00%
TIPS -1.05%

Last week the US dollar decreased in value by 0.60 percent against a basket of international currencies, making it three weeks in a row of declines. The decline in the US dollar could have been largely due to the increase in the price of oil as it continues to creep higher with global demand seeming to pick up ever so slightly. The strongest of the major global currencies last week was the British pound as it gained 1.08 percent against the US dollar; the British pound has recently been looking better and better in light of the troubles the Euro has been having. Britain’s decision to opt out of joining the Euro now looks like a very smart decision. The weakest of the major global currencies last week was the Swiss Franc, which fell by 0.59 percent against the value of the US dollar as currency traders around the world continue to adjust their positioning for the newly free floating currency.

Commodities and metals were mixed last week as oil continued to move higher and gold moved lower:

Metals Change Commodities Change
Gold -0.56% Oil 2.11%
Silver 3.18% Livestock -0.52%
Copper 0.52% Grains 0.91%
Agriculture 0.73%

The overall Goldman Sachs Commodity Index turned in a gain of 1.97 percent last week. Oil turned in a positive 2.11 percent for the week, which is a far cry from the nearly 8 percent it jumped higher two weeks ago, but it does represent the third consecutive week of gains. With three weeks in a row of gains on the books some investors are calling the recent move in oil the turn off the bottom, but it still seems early to be making that call. Much of the turnaround in the price of oil could just be short covering, in which someone who was short oil buys it back to close out their short contract. It would be more conclusive to see oil stay in a tight trading range for a little while as the trades all settle out before starting to move one direction or the other. Silver joined the party last week, moving higher by more than 3 percent, while Gold fell by a little more than half of a percent. On the more agriculture side of investing, small gains were seen across most of the investments, while livestock posted slight losses for the week.

The global financial markets cheered the deal that brought the fighting in Ukraine officially to a cease-fire, despite continued fighting in a few key cities, leading to the MSCI Russia Capped Index turning in the best performance of the week after gaining 9.82 percent. If the fighting between the two sides actually comes to an end, it is likely we will see the Russian index continue to climb higher, as hopes for a more lasting peace between the two countries will likely put many people at ease. Hong Kong saw the lowest performance of the week last week as the Hang Seng Index managed to gain just 0.01 percent over the course of the week. Over the next week much of Asia will be closed due to the lunar New Year, so trading on the Asian indexes may be much less than normal.

The third spike so far during 2015 is now officially over for the VIX as it moved lower throughout last week, closing out the week almost exactly on top of the one year average level of the VIX. While we remain significantly higher than we were throughout the majority of 2014, the VIX does appear to be set on moving lower. Much of the recent move hinges on the situation in Greece being worked out and the situation in Ukraine turning from hot to cooler. As always, the VIX is a very finicky index and is prone to very large swings in both directions. At the current level of 14.69 the VIX is implying a move of 4.24 percent over the course of the next 30 days and, as always, the direction of the move is unknown.

For the trading week ending on 2/13/2015, returns in FSI’s hypothetical models* (net of a 1% annual management fee) were as follows:

Last Week Year to Date
Aggressive Model 1.30 % 2.10 %
Aggressive Benchmark 1.56 % 2.31 %
Growth Model 0.76 % 1.43 %
Growth Benchmark 1.21 % 1.81 %
Moderate Model 0.23 % 0.75 %
Moderate Benchmark 0.87 % 1.31 %
Income Model -0.11 % 0.38 %
Income Benchmark 0.43 % 0.67 %

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

 

We made no changes to our models over the course of the previous week. We continue to look for good investment opportunities going forward. Currently, we are evaluating energy, oil and gas, healthcare and pharmaceuticals for possible investment. Energy as well as oil and gas have come way down and now look like they are trying to turn around, but it still may be early to step in. Healthcare and pharmaceuticals have been performing well over the past few weeks and currently seem to be the most likely candidates for future investment.

 

Economic News:  Last week was a slow week for economic news releases with all but one of the releases being released on Thursday. There were two releases that significantly missed market expectations (highlighted in red) and no releases that significantly beat market expectations:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Neutral 2/12/2015 Initial Claims Previous Week 304K 285K
Neutral 2/12/2015 Continuing Claims Previous Week 2354K 2395K
Negative 2/12/2015 Retail Sales January 2015 -0.80% -0.40%
Negative 2/12/2015 Retail Sales ex-auto January 2015 -0.90% -0.40%
Slightly Negative 2/13/2015 University of Michigan Consumer Sentiment Index February 2015 93.6 98.3

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

 

Last week started out late on Thursday with the release of the standard weekly unemployment related figures for the previous week. Initial jobless claims came in higher than anticipated while continuing claims came in lower, thus having an offsetting effect on each other. The bigger news of the day on Thursday, however, was the retail sales figure for the month of January, which was awful. Expectations had been for a decline of 0.4 percent on both overall retail sales and retail sales excluding autos. But the release missed these expectations showing that retail sales declined by 0.8 percent overall during January and 0.9 percent when calculated excluding auto sales. This comes on the heels of a -0.9 percent change in retail sales during the month of December, making in two months in a row of falling retail sales. This is concerning as retail sales make up a large percentage of the overall US economy. On Friday the final economic news release of the week was released, that being the University of Michigan’s Consumer Sentiment Index for the month of February (second estimate) and it indicated that the US consumer is less confident than just two weeks ago, coming in at a reading of 93.6 versus a reading of 98.3 two weeks ago. These three releases at the end of the week last week combined are concerning, as it seems to be signaling a slowdown in the US economy, an economy that is already growing at just a little more than stall speed.

 

This is a standard week for economic news releases in terms of the number of releases set to be released. The releases highlighted below have the potential to move the overall markets on the day they are released as the markets seem to be trading with a very event/news-driven mentality:

 

Date Release Release Range Market Expectation
2/17/2015 Empire Manufacturing February 2015 9
2/18/2015 Housing Starts January 2015 1070K
2/18/2015 Building Permits January 2015 1065K
2/18/2015 PPI January 2015 -0.40%
2/18/2015 Core PPI January 2015 0.10%
2/18/2015 FOMC Minutes Previous Meeting -
2/19/2015 Initial Claims Previous Week 295K
2/19/2015 Continuing Claims Previous Week 2385K
2/19/2015 Philadelphia Fed February 2015 8.5

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

 

This week starts off on Tuesday with the release of the Empire Manufacturing index for the month of February, which should provide some insight into the manufacturing that is taking place in the greater New York area. Expectations are for a reading of 9, which means that manufacturing expanded in February in the region, but that it did so at a slower pace than in December when the reading was 9.9. Any deviation of more than one or two points from this figure could cause the markets to move. On Wednesday the housing sector comes into the spotlight with Housing Starts and Building Permits being released for the month of January. Both are expected to maintain a level of more than 1 million units, which would be a very positive sign for the strength of the US housing market. Later during the day on Wednesday the Producer Price Index (PPI) is set to be released with expectations that prices at the producer level will be shown to have fallen by 0.4 percent during January, thanks in large part to the declining prices of energy. Core PPI (PPI minus energy, food and fuel costs) are expected to post a small gain of 0.1 percent during the month. Midday on Wednesday the FOMC is set to release the meeting minutes from their most recent meeting. There is not expected to be much new in the release, but as always the market could react to the release if there is anything that is not expected in the release. On Thursday the standards weekly unemployment related figures are set to be released with little change expected in either initial or continuing jobless claims. Wrapping up the week on Thursday this week is the release of the Philadelphia Fed Index for the month of February, which shows the business and manufacturing conditions in the greater Philly area. This release will likely show a figure that is in the same direction as the Empire Manufacturing index release earlier during the week. Much like the Empire index, any deviation from expectations would have to be more than a point to really make a difference.

 

Fun fact of the week—Snow in Boston

 

  1. Boston set a new record for most snowfall in a 30-day period, with 73.3 inchesbetween Jan. 12 and Feb. 10.
  2. The city’s total accumulation for the winter season is 79.5 inches,according to the National Weather Service.
  3. That means Boston needs 28.2 more inches before spring to top its all-time seasonal record of 107.6, which it reached in 1995-96.

Source: time.com

For a PDF version of the below commentary please click here Weekly Letter 2-9-2015

Commentary at a glance:

-Oil rallied for a second week in a row.

-Greece continues to drive uncertainty.

-President Obama’s budget gets a cool welcome in Capital Hill.

-Strong payroll numbers showed labor market improvement.

 

Market Wrap-Up: Last week saw all three of the major US indexes post gains that met or exceeded the declines seen two weeks ago. All three of the major indexes briefly moved back into their respective trading channels only to see two of the three indexes end the week just below their lower support level. The charts below are of the three major US indexes in green with their respective trading channels 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 with the red line:

4 charts 2-9-15

“Uncertain” would be the best word to describe the market movements of the past week and so too the movements of 2015 thus far. We have seen six moves on the Dow in excess of 450 points either up or down in just 25 trading days; this represents the epitome of a market that is searching for direction. While the markets have been searching for direction, so too has volatility which, while elevated compared to the average level seen over the past year, remains somewhat muted given the uncertainty being seen around the world. Oil was perhaps the largest driver of performance last week as it rallied for a second week in a row, having now gained more than 16 percent since the low point hit back on January 29th. The reason for the push higher in the price of oil remains unclear. It looks like investors being forced to cover their shorts, some stabilization in global supply and demand and a strike at a few key refineries in the US seem to be helping push up the prices. There is much speculation on the street as to where oil will go from here and the potential impact of such moves. Economists and analysts alike have put targets out on the price of oil that range from $20 to as much as $80 before the end of the year with some longer term estimates of $200 per barrel thanks to a lack of spending by the oil and gas industry. It really is anyone’s guess as to what the price of a barrel of oil will be at any point in the future. More important is what impact the lower price of oil will have on the US economy. The US economy will likely benefit from lower oil prices as it means lower prices at the pump and therefore consumers having more money to spend elsewhere. The trouble with this theory is that we have not seen an increase in spending as prices at the pump have declined. In fact, we have seen the opposite as consumers seem to be pulling back on spending in light of the economic uncertainty around the world.

 

National News: President Obama released his 2016 budget last week and to no surprise many of the items in the budget will be non-starters in Washington DC, with both parties having major issues with many parts of the budget. The budget, called by some a “utopian vision,” in total calls for spending of $4 trillion, while collecting $3.5 trillion in revenues, leaving a deficit of $500 billion over the course of the year. This $500 billion deficit in 2016 would be only slightly higher than it was during 2015 when it came in at $483 billion and a far cry from the more than $1 trillion deficits being consistently run just a few years ago. There are interesting aspects to the budget, such a spending almost $500 billion on public works over the next ten years. There is also spending for education, making two years of community college free and starting and funding a new early learning program for kids nationwide. While some people may disagree on how the money will be spent, there is even more disagreement on how revenues will be increased. The main focus of revenue increases is from new taxes on corporations as well as wealthy individuals. But the tax increases do not stop there; proposed tax increases also span a pack of cigarettes (from $1.01 up to $1.95), the estate tax and the capital gains tax rate. One area of spending that is not addressed in the budget is the rising costs of Social Security and Medicare; these two areas seem to be just too difficult a task for politicians to tackle. In the end, the budget outlined by the President will likely fall on deaf ears, as the Republican controlled Congress will come up with its own budget over the next few weeks and it is highly unlikely that there will be much congruency between the two. One interesting aspect of the budget is that it doesn’t really even matter as the US has routinely operated without a budget since 2007, utilizing continuing resolutions to fund the government instead of an actual passed budget. While the budget fight was just getting started in Washington DC, earnings season across the rest of the US has now passed the halfway mark for fourth quarter 2014 earnings.

 

Last week was a very busy week for earnings releases as there were many household names that released earnings with a very wide mix of positive and negative results being shown. 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:

 

1-800-Flowers.Com 1% Chipotle Mexican Grill 1% Level 3 Communications 6% Rent-A-Center -21%
Aaron’s 8% Church & Dwight -3% LinkedIn 300% Ryder System 1%
Aetna 0% Clorox 8% Martin Marietta Materials pushed Sirius 0%
Aflac 0% Cummins 2% McGraw Hill pushed Snap-On 8%
Allstate 3% Dunkin’ Brands -2% Merck & Co 2% Southern -3%
Anadarko Petroleum -55% Equity Residential 4% Moody’s 19% Sprint 22%
Archer Daniels Midland 8% Estee Lauder 8% New York Times 13% Symantec 9%
Arrow Electronics 3% Exxon Mobil 17% News Corp 8% Twitter 29%
Arthur J. Gallagher 4% General Motors 40% Noble -2% Under Armour 3%
Atmel 0% Gilead Sciences 5% O’Reilly Automotive 5% United Parcel Service 0%
Automatic Data Processing 3% GoPro 37% Philip Morris International 24% Walt Disney 18%
AutoNation 11% Hain Celestial Group 2% Piper Jaffray -8% Whirlpool 11%
Ball -1% Humana -6% Pitney Bowes 0% Wynn Resorts -17%
Boston Scientific 5% Intercontinental Exchange 2% Prudential Financial -11% Yum! Brands -6%
Buffalo Wild Wings -2% Jones Lang LaSalle 12% Ralph Lauren -4%

 

LinkedIn received a lot of headlines last week as it picked up new users as well as had a large number of users sign up for the upgraded (paid) version of LinkedIn. Disney had yet another blowout quarter, seeing far more revenues from the Frozen franchise than first expected during the holiday shopping season. On the downside, Anadarko Petroleum saw the effect of falling oil prices really hit its business during the fourth quarter of 2014, as did many of the oil and gas related companies.

 

According to Factset Research, we have now seen 323 (65 percent) of the S&P 500 companies release their results for the fourth quarter of 2014. Of the 323 that have released, 78 percent have met or beaten earnings estimates (this is down 2 percent from last week), while 22 percent have fallen short of expectations. When looking at revenue, of the companies that have reported, 59 percent of the companies have beaten estimates, while 41 percent have fallen short. Now with more than 50 percent of the member companies in the S&P 500 having reported earnings, we are past the halfway mark and quickly moving toward the end of the fourth quarter earnings season.

 

The focus of this week’s earnings releases will be the US consumer as many consumer staple related businesses release their earnings. Below is a table of the better known companies that will releases their earnings this week, with the releases that have the most potential to impact the markets highlighted in green:

 

Advance Auto Parts J M Smucker Spirit Airlines
AOL Kellogg Tesla Motors
BorgWarner Kraft Foods Time Warner
Cabela’s Martin Marietta Materials Trulia
Cisco Systems Metlife VF Corp
Coca-Cola Molson Coors Brewing Waste Connections
CVS Health Mondelez International Western Union
Dean Foods Panera Bread Whole Foods Market
Flowers Foods PepsiCo Wisconsin Energy
Groupon Red Robin Gourmet Burgers Wyndham Worldwide
Hasbro Scripps Networks Zillow

 

Kellogg and Kraft foods will likely take much of the spotlight this week in terms of earnings as they are two very large consumer staples companies with very wide reaching business lines. Tesla Motors will also likely catch a lot of attention as it is the darling company of the automotive industry as it continues to gain market share against traditional vehicles and begins to deal with increased competition from the likes of BMW and Ford. Whole Foods will also be a very interesting release this week as it reports on its attempt to lose the stigma of being the “whole paycheck” grocery store in favor of a broader consumer-friendly store.

 

International News: International news last week was really just a regurgitation of the same old news stories continuing to play out. Violence in Eastern Ukraine flared up once again as Russia and the rest of the world seem to remain at odds over what the outcome of the conflict will be. Russia seems willing and able to continue to help the “rebels” in the region, while the world seems content with trying to negotiate a political deal to end the violence. However, there is no reason to actually believe President Putin will follow any new peace agreement any more than he has followed past deals, which are not worth much more than the paper they were written on. Greece, while technically not at war with the rest of Europe, looks ready to fight with Europe over bailout funds and the impact the bailout terms are having on the Greek economy.

 

Over the course of the past week both Prime Minister of Greece Alexis Tsipras and Greek Finance Minister Yanis Varoufakis went on a multi-country tour of Europe, meeting with various political and financial leaders in Europe. Their story was the same to everyone: they want a reduction in the debts of Greece and more favorable terms for the remaining debts. The reaction was also by and large the same as nearly all of the individuals they met with did not go along with the ideas being pitched. Perhaps the most comical of the meetings was between the German Finance Minister, Wolfgang Schauble, and his Greek counterpart, after which Varoufakis said they had agreed to disagree. No sooner had he said this than Minister Schauble interjected that they did not even agree on that. At the end of the meeting both sides were said to be just as far apart as they had been prior to the meeting and perhaps even a little further apart. The trouble for Greece continued to mount last week as the ECB announced that it would no longer take Greek debt as collateral for loans in the future with the current uncertainty about the government’s pending actions effectively cutting the country off from a potential bailout from the ECB. One more lifeline is gone and time is quickly starting to run out for Greece with the world watching and waiting to see what Greece is willing to do. Former Chairman of the US Federal Reserve Greenspan came out over the weekend and said that he sees Greece leaving the Euro in short order and that it will be better for all involved to not have Greece as part of the monetary union. While Greenspan jumping into the fray may seem like a big deal it is not the first time he has said the Euro is doomed or that it will fail in the long run. He has been saying this for many years. Whatever the outcome, Greece is a very big wildcard right now for the global financial markets, a wildcard that will surely be played in the coming months. Right now the odds of a Grexit (Greek exit from the Euro) are for sure increasing; this is most evident by the rate seen on the 2-year and 10-year Greek government bonds, which are yielding 20.7 percent and 11 percent, respectively. The next big day for Greece and Europe is Wednesday when the Eurozone finance ministers all meet together. It is thought that Greece will request bridge financing for a while, some say through the end of August, to buy time to come up with a better long-term plan. This plan, if pitched, will likely be met with a lot of opposition with opponents rightly saying that if Greece is waiting to get a longer term deal in place it should not be rolling back austerity measures and increasing spending, which the new government wasted no time in doing over the past three weeks. Ultimately, Greece doesn’t have anything to offer the rest of Europe; its economy is microscopic and it is causing massive amounts of headaches, headaches that would be alleviated if Europe just said “no” and stopped the life support for the country. If Greece is locked out of the global capital markets and the banks in Greece cannot get Euros from the ECB it will be forced to move onto its own currency, which may not be such a bad outcome. The real question then becomes how Europe can build in safeguards in the future to stop other countries from bailing on their promises and departing from the Euro, including weak countries like Spain or even strong countries like Germany.

 

Market Statistics:

Index Change Volume
Dow 3.84% Above Average
S&P 500 3.03% Above Average
NASDAQ 2.36% Above Average

 

After being down a large amount two weeks ago it was nice to see the bounce back in the US markets last week as investors seemed willing to once again make more risky investments. Volume overall was above average last week, but a little below the weekly volume we saw two weeks ago when the markets were falling. This imbalance in volume and market movements suggests that the recent movements really have just been investors adjusting positions around the movement of oil and not something larger like investors either pulling out or moving into the markets in any large scale.

 

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
Broker Dealers 7.65% Utilities -3.64%
Regional Banks 7.51% Residential Real Estate -2.34%
Oil & Gas Exploration 6.73% Biotechnology -1.88%
Telecommunications 6.06% Infrastructure -0.24%
Energy 5.81% Healthcare 0.41%

Oil and Gas Exploration made it three weeks in a row last week of gains as oil continued to be the main driving force behind the market movements. This movement spilled over into Energy more broadly last week and was also the leading cause of the decline in the utility sector. With US yields increasing last week from the very low level hit two weeks ago it was not surprising to see Real Estate move lower last week, as much of the US real estate market is tied to yields on the fixed income instrument indirectly through mortgage rates.

Fixed income moved lower last week as investors seemed to be willing to step out of the safety of US fixed income investments in favor of other investment opportunities:

Fixed Income Change
Long (20+ years) -5.29%
Middle (7-10 years) -2.43%
Short (less than 1 year) 0.01%
TIPS -1.53%

Last week the US dollar decreased in value by 0.28 percent against a basket of international currencies, making in two weeks in a row of declines. The decline in the US dollar could have been largely due to the increase in the price of oil or it could have been due to optimism about other currencies, such as the Euro and the Swiss Franc, which have been on wild rides over the past few weeks. With oil moving higher it was not surprising to see that the Canadian Dollar turned in the best performance of the week, gaining 1.62 percent against the US dollar as much of the Canadian economy is based on oil. The weakest of the major global currencies last week was the Japanese Yen, which resumed its downward movement last week, falling by 1.41 percent against the value of the US dollar.

Commodities and metals were mixed last week as oil moved sharply higher and gold and silver slid lower:

Metals Change Commodities Change
Gold -3.90% Oil 8.03%
Silver -3.08% Livestock -2.26%
Copper 3.72% Grains 3.56%
Agriculture 1.12%

The overall Goldman Sachs Commodity Index turned in a gain of 5.43 percent last week. Oil was the big winner of the week last week, gaining more than 8 percent over the course of the week. Some of the gain was due to a shift in global supply and demand, while more of the move was attributed to investors trying to time the bottom of the oil market and catch the turn. This trying to time the bottom for oil can become somewhat of a self fulfilling prophecy; if enough people see what looks like a turn up and then pile into the trade, it will push the price of oil higher. While Oil was moving higher, Gold and Silver were having a rough week last week, falling by more than three percent each, as investors seemed to be pulling out of the precious metals in favor of more risky assets. The more industrially used Copper got a bump last week of almost 4 percent, thanks in large part to emerging markets buying the semi precious metal.

With the fighting in Ukraine seemingly intensifying it was somewhat confusing to see that Russia led the way higher last week out of all the global indexes, gaining 11.29 percent as measured by the MSCI Russia Capped Index. Trying to make heads to tails out of what is going on in Ukraine and how the global financial markets will take the developments seems like an impossible task at the moment. China was on the losing side of the global financial markets last week with the Shanghai based Se Composite Index falling by 4.19 percent over the course of the week as investors call into question the predicted growth rates for the county.

The wild yo-yo ride continues on the VIX as we saw yet another week of drastic movements last week with the VIX giving up more than 17 percent, but still closing the week out above 17 at 17.29. Risk in the form of volatility really seems to be tossing around in the current market as investors attempt to adjust their level of fear on seemingly every little news story about either oil, Greece or Ukraine. This trend in volatility looks like it will be with us for a while to come as we have only had four trading days so far this year that the VIX has been under 17, compared to the 21 days it has been above. For comparison purposes, the VIX during all of 2014 was only above 17 for a total of 29 days. At the current level of 17.29 the VIX is implying a move of 5 percent over the course of the next 30 days. As always, the direction of the move is unknown.

For the trading week ending on 2/6/2015, returns in FSI’s hypothetical models* (net of a 1% annual management fee) were as follows:

Last Week Year to Date
Aggressive Model 1.92 % 0.78 %
Aggressive Benchmark 2.23 % 0.74 %
Growth Model 1.57 % 0.65 %
Growth Benchmark 1.73 % 0.60 %
Moderate Model 1.16 % 0.50 %
Moderate Benchmark 1.24 % 0.44 %
Income Model 0.73 % 0.48 %
Income Benchmark 0.62 % 0.24 %

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

 

We made no changes to our models over the course of the previous week. We continue to watch several of our positions to make sure they are still the best current investment option. Performance of our overall models has seemed to be driven by investors’ demand or lack thereof for consumer staples. Many of our equity positions that have long term investment horizons have been moving into and out of favor rapidly so far this year; our thoughts on these positions have not changed. The stocks and companies we own are strong brands that will be around for a long time into the future and they will likely continue to pay nice dividends. So while the day to day or week to week movements may seem like large changes, they really are attributed to the wondering nature of the markets right now and the impact it is having on our overall models. Energy continues to be an area of great interest as it has come down so far from the peak of a few months ago, that it looks relatively cheap, but investments are cheap for a reason and the reasons that made oil as cheap as it is now don’t seem to have fully played out as of yet.

 

Economic News:  Last week was a tame week for economic news releases with the majority of the releases coming in at market expectations. There were two releases that significantly beat market expectations and no releases that significantly missed market expectations:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Neutral 2/2/2015 Personal Income December 2014 0.30% 0.30%
Neutral 2/2/2015 Personal Spending December 2014 -0.30% -0.20%
Neutral 2/2/2015 ISM Index January 2015 53.5 54.7
Neutral 2/4/2015 ADP Employment Change January 2015 213K 230K
Neutral 2/4/2015 ISM Services January 2015 56.7 56.5
Neutral 2/5/2015 Initial Claims Previous Week 278K 290K
Neutral 2/5/2015 Continuing Claims Previous Week 2400K 2388K
Positive 2/6/2015 Nonfarm Payrolls January 2015 257K 235K
Positive 2/6/2015 Nonfarm Private Payrolls January 2015 267K 225K
Neutral 2/6/2015 Unemployment Rate January 2015 5.70% 5.60%

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

Last week started out on Monday with the release of personal income and spending, with income showing an increase of 0.3 percent, while spending posted a decline of 0.3 percent. Much of this decline in spending was attributed to the decline in prices at the pump, which is good, but it was negative to see that people decided not to spend this savings elsewhere in the everyday activities, opting rather for holding on to their savings. Also released on Monday was the OSM Index, which posted a modest decline in the speed of growth from the level seen in December, but still signaled growth overall. On Wednesday the start of the employment related figures for the week was released with the ADP employment change index for January showing the creation of 213,000 new jobs during the month. This figure was not enough to force any changes in the predictions for the overall unemployment rate, which was released later during the week. On Thursday the standard weekly unemployment related figures were released and there were no major surprises in either of the releases. On Friday the releases everyone was waiting all week for were released, those being the payroll and unemployment data points released by the government. Payrolls, both public and private, increased by more than expected with both figures posting numbers over 250,000. This good news, however, was dampened a little by the overall unemployment rate increasing from 5.6 percent up to 5.7 percent, with the increase being attributed to an increase in the labor force participation rate, which increased from 62.7 up to 62.9 during the month of January. We have seen other small upticks in labor force participation in the past that have ultimately not been the start of a trend, so we will have to wait and see if this uptick is more than just a onetime item, but if a trend of an increasing labor force participation rate does emerge it could be very positive for the overall health of the US economy.

 

This is a slow week for economic news releases as the only releases that really have the chance to make a large impact on the overall movements of the markets are the retail sales figures released on 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
2/12/2015 Initial Claims Previous Week 285K
2/12/2015 Continuing Claims Previous Week 2395K
2/12/2015 Retail Sales January 2015 -0.40%
2/12/2015 Retail Sales ex-auto January 2015 -0.40%
2/13/2015 University of Michigan Consumer Sentiment Index February 2015 98.3

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

 

This week starts on Thursday with the release of the standard weekly unemployment related figures for the previous week, both of which are not expected to show much of a change over the figures posted last week. In addition to the unemployment related figures on Thursday the government also releases the retail sales figures for the month of January. Retail sales are expected to post a slight decline of 0.4 percent during the month, thanks in large part to the falling prices of gasoline and energy. This decline is also not supposed to have been affected by a change in sales of automobiles, as retail sales excluding auto sales are also expected to have declined slightly. This decline in retail sales, if it comes to fruition, would be the second month in a row of declines since December posted a drop of 0.9 percent. For whatever reason, retail sales are declining at a time when the US economy is supposed to be strong enough for the Fed to start raising interest rates, a trend that may give the Fed pause about taking action. This week wraps up with the release of the University of Michigan’s Consumer Sentiment Index for the month of February, which is expected to show very little change over the level seen at the end of January.

 

Fun fact of the weekBrown is the only color not used for a Euro banknote.

 

The 5-euro note is grey

the 10 is red

the 20 is blue

the 50 is orange

the 100 is green

the 200 is yellow

the 500 is purple.

 

Have a great week!

For a PDF version of the below commentary please click here Weekly Letter 2-2-2015

 

Commentary at a glance:

-Fallout from the Greek elections is unfolding, leaving the markets uncertain.

-Weakness in consumer spending in the US has started to take its toll on the financial markets.

-Earnings season in the US continues and is improving.

-Overall economic news releases came in below market expectations last week.

 

Market Wrap-Up: All three of the major US indexes moved lower last week and, in doing so, they have taken out one of the levels of support, represented by the lower edge of the trading channels in the charts below. All three indexes, however, remain above the previous low point seen back in the middle of December, meaning they are still in the wide trading ranges (horizontal levels not drawn below) set by that lower December level. The charts below are of the three major US indexes in green with their respective trading channels 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 with the red line:

4 charts 2-2-15

The US financial markets are technically weaker at the start of this week than they were this time last week, but we are now at some very important levels on several of the indexes, levels that may tell which way the markets will be headed in the coming weeks and months. The trading channels (red lines) drawn above on the index charts show all three indexes breaking below their trading channels at various points during the week last week. While this is technically a negative, most technical traders will be watching other key support levels over the coming days to try to gauge if there is a lot more downside to these markets or if the decline is behind us. One technical level that will be watched is the low point on each of the indexes made back in the middle of December. On the Dow, coincidently, this point is right about the 17,000 level, which is a major psychological level for investors as well. If the Dow comes down and easily moves through and closes below the 17,000 it would be a technical sign that the markets could be headed lower. The level to watch on the S&P 500 is 1,975 and on the NASDAQ the level is 4,550. In technical analysis, confirmations of moves are also important. In the case of three major indexes, one breaking down is a yellow flag, while two or all three breaking down at roughly the same time is a much more meaningful and negative signal. The last time the markets were at these levels it took only 5 trading days for them to correct higher and again make new all time highs on the Dow and the S&P 500; it just goes to show that the markets can turn around in a split second for very little apparent reason.

 

The choppy trading of the major indexes over the course of the past few weeks has been a result of several macro themes and risks. Uncertainty over the fall in the price of oil and the impact, either positive or negative, on the global economy has been front and center during this period of heightened volatility. At first glance, if consumers are spending less on gasoline they should in turn have more money to spend elsewhere. But if they are not spending that money and rather just holding onto it, the decline in gas prices may have little or no positive effect on the overall economy. This theory holds true in most countries that are net importers of oil. Net exporters of oil, like many countries in the Middle East and Russia, have a very different situation playing out in which they are receiving much less income from their oil being exported and thus the governments are starting to feel the pinch of low revenues. This catch 22 also plays into deflation seen in several major economic areas such as Europe and Japan, which were already experiencing the start of deflation prior to the decline in the prices of fuel and energy. This deflation is the main driving force behind the European Central Bank’s (ECB) actions taken two weeks ago. The other major theme that is once again driving the markets is uncertainty over Europe.

 

It seems every few years the global financial markets focus on the troubles in Europe and push the Europeans to take actions to remedy the situation. Most recently it has been uncertainty over the new government recently formed in Greece. The new government seems hell-bent on ending the austerity programs put in place by the former Greek governments to secure bailout funds. It also seems set on renegotiating the terms of the bailout funds Greece has already received. This would be the same as a person walking into their bank and demanding that either their mortgage be extended, principal be forgiven or that they be granted a stay of payments with no interest accruing. All three of those requests would likely get a laugh out of your mortgage banker, but that is about all. Germany is coming down pretty hard on the topic saying “no” to the adjustments to outstanding debt, seemingly calling Greece’s new government’s bluff on this topic, but the government may not be bluffing; more on this topic in the international section below. With the two above mentioned macro themes running their respective courses it is no wonder that investors and consumers alike a feeling a little uncertain as to the future and adjusting their portfolios and lifestyles for the uncertainty.

 

National News: National news last week focused on a few items, some of which are pertinent to the financial markets and some that were not. The Super Bowl took a lot of headlines last week as rumors and speculation over “deflategate” ran rampant leading up to the Patriots’ win in Super Bowl 49. Apparently, deflation is alive and well here in the US, only it’s observed in the NFL rather than the economy, as it is in Europe. The other news last week was about consumer spending or more precisely, the lack thereof. Economic data shows that the US consumer is slowing down spending despite the decline seen in the price of gasoline at the pump. Durable goods orders were the latest figures to show weakness as consumers are not spending as they used to on big ticket items. Personal spending has also been coming down recently, which is a sign that while the consumer may have more money to spend, consumers are holding onto cash or paying down debt, which is prudent in many cases for the individuals, but not helpful for the overall economy. This slow down in spending is being seen in many sectors of the markets as companies release their earnings for the fourth quarter of 2014.

 

Last week was right in the middle of earnings season and, when combined with this week, we will see more than half of the S&P 500 component companies release their earnings. Below is a table of the well known companies that released earnings last week with earnings that missed expectations highlighted in red, while earnings that beat expectations by more than 10 percent are highlighted in green:

 

3M 1% Electronic Arts 37% Lexmark International -3% Sherwin-Williams 1%
ADT 4% Eli Lilly and 1% Lockheed Martin 7% Stanley Black & Decker 2%
Altria Group -1% Energizer Holdings -4% Martin Marietta Materials pushed Stryker -1%
American Airlines 1% Ethan Allen -18% MasterCard 7% Swift Transportation 15%
American Electric Power -8% Facebook -3% McCormick & Company 2% T. Rowe Price Group 4%
Apple 18% Ford Motor 18% Microsoft 10% Texas Instruments 0%
AT&T 0% Freeport-McMoRan -29% Newell Rubbermaid 2% Time Warner Cable -3%
Autoliv 12% General Dynamics 4% Norfolk Southern 0% Tractor Supply 7%
Boeing 12% Google -6% Northrop Grumman 2% Tuesday Morning -5%
Bristol-Myers Squibb 15% Hanesbrands 1% Nucor 18% Tyson Foods 7%
Caterpillar -13% Harley-Davidson 6% Oshkosh 24% United States Steel 104%
Chevron 11% Hershey -2% Pfizer 2% Visa 1%
Coach 11% Hess -38% Praxair 0% Weyerhaeuser -4%
Colgate-Palmolive 1% Ingersoll-Rand PLC 17% Procter & Gamble 7% Whirlpool pushed
ConocoPhillips -3% J & J Snack Foods -14% PulteGroup 5% Wynn Resorts pushed
Corning 18% Jacobs Engineering -1% Raytheon 4% Xcel Energy 15%
D.R. Horton 11% Kirby 4% RLI 18% Xerox 11%
Dow Chemical 25% Las Vegas Sands 14% Seagate Technology -1% Yahoo! 5%

 

With so many companies in such a wide array of industries reporting earnings last week it was not surprising to see a lot of red and green in the above table. One theme that was fairly pronounced last week was that the US consumer seems to be spending less, while US businesses seem to be spending more. For instance, J&J Snack Foods Group missed earnings, despite having a very diverse selection of products in almost every grocery store in the country, while a company like Nucor easily beat earnings due to strong industrial demand for steel products. If this trend continues it could be difficult for the US to grow at the near 3 percent GDP growth rate that is expected during 2015 as the US consumer is a very large percentage of spending and a major growth driver in the overall US economy.

 

According to Factset Research, we have now seen 227 (45 percent) of the S&P 500 companies release their results for the fourth quarter of 2014. Of the 227 that have released, 80 percent have met or beaten earnings estimates, while 20 percent have fallen short of expectations. This 80 percent of companies beating earnings expectations would represent the highest percentage since the third quarter of 2010 if the figure holds through the end of the reporting season. When looking at revenue of the companies that have reported, 58 percent of the companies have beaten estimates, while 42 percent have fallen short. We are nearing the half way point for this earnings season and while a lot can change in a short amount of time, it so far is looking like a decent earnings season.

 

The fourth quarter 2014 earnings season continues this week with more than 750 companies releasing their earnings results, in what is one of the busiest weeks for well known companies of the season. Below is a table of the better known companies that will release their earnings this week, with the releases that have the most potential highlighted in green:

 

1-800-Flowers.Com Chipotle Mexican Grill Level 3 Communications Ralph Lauren
Aaron’s Church & Dwight LinkedIn Rent-A-Center
Aetna Clorox Martin Marietta Materials Ryder System
Aflac Cummins McGraw Hill Sirius
Allstate Dunkin’ Brands Merck & Co Snap-On
Anadarko Petroleum Equity Residential Moody’s Southern
Archer Daniels Midland Estee Lauder New York Times Sprint
Arrow Electronics Exxon Mobil News Symantec
Arthur J. Gallagher General Motors News Corp Twitter
Atmel Gilead Sciences Noble Under Armour
Automatic Data Processing GoPro O’Reilly Automotive United Parcel Service
AutoNation Hain Celestial Group Philip Morris International Walt Disney
Ball Humana Piper Jaffray Whirlpool
Boston Scientific Intercontinental Exchange Pitney Bowes Wynn Resorts
Buffalo Wild Wings Jones Lang LaSalle Prudential Financial Yum! Brands

 

The US consumer and consumer spending seems to be the focus of companies releasing earning this week as once again many household names are due up to release. UPS will be very closely watched this week as the company handles so many packages and touches such a wide range of businesses that it has a very good handle on the health of the overall US economy long before the economic numbers are released. Both Twitter and LinkedIn also release earnings this week and will likely have a large following as they are two of the darling technology companies that many investors take as bellwether companies for next generation technology. The last of the major companies likely to grab headlines over the course of this week is Exxon, as it releases its results from a time when the price of oil was plummeting and the costs of drilling were increasing.

 

International News: International news last week was all about Europe and Greece in particular as the newly formed government headed by Alexis Tsipras has made a few interesting statements while trying to back pedal from others made during the election. The new finance minister, well known Greek economist Yanis Varoufakis, is currently attempting to get Europe to go along with a 50 percent write-down of outstanding Greek debt. At the same time, Prime Minster Tsipras has been quoted as saying, “It has never been our intention to act unilaterally on Greek debt,” in an attempt to cool the nervous heads of state such as German Chancellor Merkel. Any negotiations will be very difficult for the Greeks as there have already been several rounds of debt forgiveness and write-downs in the past that have saved Greece from the brink of financial ruin. This time around the Germans also seem to be a bit more steadfast in their resolve not to adjust the outstanding debt, as indicated by Chancellor Merkel over the weekend when she said, “There has already been voluntary debt forgiveness by private creditors, banks have already slashed billions from Greece’s debt. I do not envisage fresh debt cancellations.” With Germany bearing the brunt of the debt forgiveness in the past, the country has a lot at stake in any new changes to the austerity measures or financial plans already in place. So we are in for a bit of a stalemate situation where the outcomes are very well known:

 

  1. Greece can try to make changes unilaterally, which will ultimately result in a default on its debts—Possible

 

  1. Germany, Portugal and Finland can give in and allow the adjustments to be made, despite themselves lose a lot of money to the changes—Likely

 

  1. The ECB can step in and provide liquidity through its new lending program, enough to keep Greece afloat for a while as the country tries to figure things out—Most Likely

 

  1. Greece could in effect be kicked out of the Euro zone, and have to come up with its own currency and trade agreements—Highly Unlikely

 

It seems, given the above options or some combination of the above options, that the best outcome for the global financial markets would be option 3, with the ECB stepping in and providing the liquidity needed for Greece to gain enough time to see if the new plans laid out by the government will actually work or not. The rest of Europe is watching Greece and fears of contagion are building. In Spain over the weekend there was a very large turnout for a far left wing rally that was calling for the same kind of debt forgiveness the Greeks are seeking, but on Spanish debts to the rest of Europe. Rallies of similar kinds have been held in various cities throughout Europe over the past few months. Greece really could be somewhat of a tipping point that spells the end of the Eurozone as we have come to know it.

 

Market Statistics:

Index Change Volume
NASDAQ -2.58% Above Average
S&P 500 -2.77% Way above Average
Dow -2.87% Way Above Average

 

After seeing several weeks of below average volume on the three major US indexes, last week saw higher than average volume as the markets moved lower on fears out of Europe and fears of a slowdown in the US economy took hold.

 

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 2.10% Technology -4.19%
Oil & Gas Exploration 0.43% Semiconductors -3.92%
Utilities -0.04% Software -3.87%
Biotechnology -0.24% Transportation -3.70%
Materials -0.40% Insurance -3.54%

With such a large downturn in the markets it was hard to find any sectors of the market that saw positive performance; but there were two lone sectors that managed to post gains last week. The US Home Construction sector was the best performing sector, thanks to a few key earnings results that were better than expected in a sector that has very few component companies. Oil and Gas Exploration also saw positive performance last week, but this was mostly due to investors looking for bargains after the sector had declined more than 30 percent since June. With gainers being hard to find it was much easier to find sectors of the market that racked up the losses over the course of the previous week with the largest losses being seen in the Technology sector. Technology, Semiconductors and Software led the way lower last week as some investors sold out of positions that were likely holding large gains and moved toward assets that are historically safer in a choppy market.

Fixed income moved higher last week as international investors remain unsure of the potential deals between the EU and Greece following the Greek election results. This uncertainty has been very favorable to US fixed income as demand has been very high, thus driving the bond yield lower and lower, with the 10-year US bond yielding less than 1.65 percent during part of the week last week:

Fixed Income Change
Long (20+ years) 2.60%
Middle (7-10 years) 1.20%
Short (less than 1 year) -0.01%
TIPS 1.15%

Last week the US dollar decreased in value by 0.32 percent against a basket of international currencies, ending what was a 6 week streak of gains. While the dollar did move lower last week it was by a much smaller amount than it had moved over the previous few weeks, with the US dollar still looking like the safest of the global currencies. While there may be uncertainty about the future of the Euro, the British Pound had no trouble being the best performing currency last week, gaining 0.53 percent against the US dollar. The weakest of the major global currencies last week was the Swiss Franc, which slid 4.36 percent against the dollar, now having given up more than one third of the gains experienced after the removal of the peg earlier in January.

Commodities and metals were mixed last week as oil reversed course and moved higher:

Metals Change Commodities Change
Gold -0.63% Oil 4.96%
Silver -5.54% Livestock 2.61%
Copper -5.34% Grains -3.47%
Agriculture -1.45%

The overall Goldman Sachs Commodity Index turned in a gain of 2.66 percent last week, while the Dow Jones UBS Commodity Index declined by 0.05 percent. Oil was the deciding factor between the two indexes and the largest driver of the deviation in performance. Oil looked like it was going to notch yet another week of losses going into the trading day on Friday, but with a strong turn and upward move on Friday managed to end the week with nice gains after bouncing off of the $45 per barrel price level. All three of the commonly traded metals lost value over the course of the previous week as investors seemed to be booking some profits on the gains experienced since the middle of November.

The best performing index globally is one that rarely is either best or worst in any time frame of performance—Sweden. Last week the Stockholm based OMX Stockholm 30 Index increased by 2.42 percent, thanks in large part to better than expected earnings results from a few of the member companies in the index. With the fighting in Ukraine seemingly intensifying it was not surprising to see that Russia turned in the worst performance of any of the major global indexes last week, falling 8.83 percent as measured by the MSCI Russia Capped Index.

The wild yo-yo ride continues on the VIX as we have now seen moves in excess of 20 percent during each of the past three weeks. Last week the VIX moved higher by 25.87 percent as fears over what will be coming for Europe seemed to be driving investors to make changes and adjust for more volatile times. Just as soon as the last spike ended another one has clearly begun and we once again find ourselves back above the 17 level on the VIX. At the current level of 20.97 the VIX is implying a move of 6.05 percent over the course of the next 30 days. As always, the direction of the move is unknown.

For the trading week ending on 1/30/2015, returns in FSI’s hypothetical models* (net of a 1% annual management fee) were as follows:

Last Week Year to Date
Aggressive Model -2.95 % -1.12 %
Aggressive Benchmark -1.71 % -1.46 %
Growth Model -2.66 % -0.90 %
Growth Benchmark -1.32 % -1.11 %
Moderate Model -2.26 % -0.65 %
Moderate Benchmark -0.95 % -0.79 %
Income Model -1.79 % -0.25 %
Income Benchmark -0.47 % -0.38 %

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

 

We made no changes to our models over the course of the previous week as volatility seemed to be amplified at the end of the week with the Dow seeing several days of very wide trading ranges. We continue to monitor our holdings while looking for new opportunities; and while some of these opportunities are starting to look good, they also look like they could continue to look even better in the near future.

 

Economic News:  Last week saw much more red than normal in the weekly economic news releases and seemed to be a week that saw very mixed messages out of the releases. There was one release that significantly beat market expectations (highlighted in green) and several releases that significantly missed market expectations (highlighted in red):

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Negative 1/27/2015 Durable Orders December 2015 -3.40% 0.50%
Negative 1/27/2015 Durable Goods -ex transportation December 2015 -0.80% 0.70%
Neutral 1/27/2015 Case-Shiller 20-city Index November 2015 4.30% 4.30%
Positive 1/27/2015 Consumer Confidence January 2015 102.9 95.5
Neutral 1/27/2015 New Home Sales December 2015 481K 450K
Slightly Positive 1/29/2015 Initial Claims Previous Week 265K 301K
Slightly Positive 1/29/2015 Continuing Claims Previous Week 2385K 2430K
Negative 1/29/2015 Pending Home Sales December 2015 -3.70% 0.60%
Slightly Negative 1/30/2015 GDP-Adv. Q4 2014 2.60% 3.20%
Neutral 1/30/2015 Chicago PMI January 2015 59.4 58
Neutral 1/30/2015 University of Michigan Consumer Sentiment Index January 2015 98.1 98.2

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

 

Last week started off on Tuesday with the release of the durable goods orders for the month of December, which came in very poor and much below market expectations. The market had been looking for around half a percent gains, both including and excluding transportation, but instead both figures came in very negative. Overall orders showed a decline of 3.4 percent, while orders excluding transportation fell by nearly one percent. With December being negative we have now seen four consecutive months of durable goods orders declining, which is a trend by almost all measures. At the same time that spending is dropping, consumer confidence was shown to be 102.9 according to the government’s release that came out Tuesday. The 102.9 level is the highest consumer confidence figure we have seen since August of 2007—more than seven years ago. This positive figure was also reinforced on Tuesday by two other releases: the Case-Shiller 20 City Home Price Index for November and the New Home Sales figure for the month of December, both of which did not show broad based weakness. On Thursday the standard weekly unemployment related figures were released with both figures coming in better than anticipated. In fact, the initial jobless claims figure was the best posted by the release since 2000. The dampener on Thursday to all of the positive releases was the pending home sales figure for the month of December, which showed a decline of 3.7 percent compared to expectations of 0.6 percent increase during the month, but this was just a single negative data point. We will have to wait and see if a trend emerges. On Friday the advanced estimate of GDP for the fourth quarter of 2014 was released and came in slightly lower than expected at 2.6 percent, compared to expectations of 3.2 percent. While the number may have been lower than expected we still have at least two more revisions to the figure and, as we have all found out recently, the revisions can be very large. Wrapping up the week last week on Friday was the release of the University of Michigan’s Consumer Sentiment Index for the month of January (final estimate), which showed little change over the mid-month estimate at 98.1. We currently have a confident consumer that is not spending, as mentioned above, and all of the data seems to be pointing to this phenomena.

 

This is a slow week for economic news releases but there are several releases that could have an impact on the overall movement of the market with the focus of those releases being employment. The releases highlighted below have the potential to move the overall markets on the days they are released:

 

Date Release Release Range Market Expectation
2/2/2015 Personal Income December 2014 0.30%
2/2/2015 Personal Spending December 2014 -0.20%
2/2/2015 ISM Index January 2015 54.7
2/4/2015 ADP Employment Change January 2015 230K
2/4/2015 ISM Services January 2015 56.5
2/5/2015 Initial Claims Previous Week 290K
2/5/2015 Continuing Claims Previous Week 2388K
2/6/2015 Nonfarm Payrolls January 2015 235K
2/6/2015 Nonfarm Private Payrolls January 2015 225K
2/6/2015 Unemployment Rate January 2015 5.60%

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

 

This week kicks off on Monday with the release of consumer income and spending for the month of December as well as the overall ISM index for the month of January. Consumer income is expected to show a slight increase, while spending is expected to post a decline. Look for the spending figure to have more weight than the income figure and if the trend of spending misses continues it could be seen as negative for the health of the US economy. The ISM index is expected to be about the same in January as it was in December, so it would take a wide deviation on this figure for the market to really take notice.  On Wednesday the start of the employment related figures is set to be released with the ADP Employment change figure for the month of January, which is expected to show that about 230,000 jobs were created during the month. Any wide deviations from this expectation will likely have economists revising their models for the employment releases set to be released on Friday. Also released on Wednesday is the services side of the ISM, which will likely not impact the markets and move in roughly the same direction and magnitude as the overall ISM released earlier during the week. On Thursday the standard weekly unemployment related figures are set to be released with expectations that both figures will be a little higher than the very positive figures we saw last week. On Friday the big releases of the week are set to be released, those being the overall unemployment rate in the US during the month of January and the nonfarm public and private payroll figures for the month of January. The overall unemployment rate is expected to be unchanged at 5.6 percent and both of the payroll figures are expected to be a little lower than they were in December. As always, the participation rate and the overall U6 unemployment rate released at the same time will likely have just as much driving force for the movements of the markets as the more headline releases. In addition to the scheduled economic news releases, there are five speeches by five different FOMC members over the course of the week that could draw headlines as they attempt to outline the stance taken by the Fed as to when they will begin to increase interest rates.

 


Fun fact of the week—Greece thinks highly of itself.

Below is a table I found humorous on a call with another adviser last week. It is originally from the Spring 2013 Global Attitudes survey administered by the Pew Research Center.

Greece Sterotype

It sure feels great to be Greek!

For a PDF version of the below commentary please click here Weekly Letter 1-26-2015

Commentary at a glance:

-Syriza has taken the Greek elections and government by storm.

-The European Central Bank has unleashed its first full scale round of quantitative easing.

-Earnings season in the US continues to plow ahead.

-The death of Saudi King Abdullah has increased uncertainty as to the future movements of oil.

 

Market Wrap-Up: Last week saw all three of the major US equity indexes make it back up into their trading channels after having broken down below them two weeks ago. This upward move in the markets was also accompanied by a sharp downward move in the VIX as investors seemed to cheer on the ECB move and appear unafraid of the Greek elections. The charts below are of the three major US indexes in green with their respective trading channels being draw 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 draw with the red line:

4 charts 1-26-15

As you can see in the above charts, the markets have been chopping wildly over the course of the past month and a half. Some investors would say that it is a consolidation pattern that could be the start of the end of the bull market we have been enjoying since March of 2009, while others would say the market is just catching its breath after such a strong move at the end of 2014. Whatever the reason, the markets currently seem stuck within very wide trading channels. These trading channels have been created because of the low volume environment and the unusual number of major geopolitical and central banking risks we have seen over the past month. The NASDAQ (lower left pane above) is the strongest of the three major indexes, as it was last week, and the Dow (upper right pane above) and the S&P 500 (upper left pane above) remain virtually tied in terms of technical strength. The VIX moved lower in a big way last week, giving back all of the gains and a little more from the level seen two weeks ago. While the most recent spike in the VIX now seems to be behind us, it seems to be an unlikely time for the VIX to become too complacent as there remains a lot of uncertainty surrounding major economic regions such as the Eurozone and Japan.

 

National News: National news last week focused on politics with the President’s State of the Union address as well as the continuing decline in the price of oil and, in turn, gasoline at the pumps. On Tuesday evening President Obama delivered his 2015 State of the Union address and, much like many second term Presidents closer to the end of their time in office than the beginning, the speech seemed at times more like a victory lap than a political speech. There were a few ideas floated in the speech that could have some legs, but by and large, with Congress being controlled by Republicans, it seems the next two years will see very little substantial work done between the Capitol and the White House. For those of you who turned off the TV after hearing the President’s speech you did not miss much in the form of the Republican Response, which sounded more like a midterm election wrap up than a response to the President’s speech. One point that was made by both sides was that of oil independence for the US from the Middle East and the benefit of falling prices at the pump for middle class Americans.

 

Oil, and with it the prices at the pump, have been declining sharply since September, when the oversupply of global oil finally took hold of the oil market. As illustrated by the chart to the right, falling oil prices have had a very noticeable impact on the price of gasoline, which as calculated by AAA’s fuel gauge report now stands at $2.10 per gallon on a nationwide average. oil decline 1-26-15Some states are lucky enough to be paying under $2 per gallon, such as Colorado where the average price of a gallon of gas, as of the latest fuel gauge report, was reported to be $1.98. The effect of the lower prices at the pump should have a positive impact on countries that are net importers of oil, while potentially having very negative impacts on countries around the world that are net exporters of oil. While we have not seen a boost in overall spending by Americans due to the decreased prices at the pump we will likely see a little boost in spending on consumer discretionary items in the near future if prices remain low. While oil continues to decline, earnings season for the fourth quarter of 2014 continues to advance.

 

With the official start to earnings season just two weeks ago we now find ourselves right in the midst of earnings season as many of the major global companies continue to report their earnings. Below is a table of the well known companies that released earnings last week with earnings that missed expectations highlighted in red, while earnings that beat expectations by more than 10 percent are highlighted in green:

 

Alaska Air 3% Honeywell International 1% Precision Castparts 0%
American Express 1% IBM 7% SanDisk 0%
Baker Hughes 33% J B Hunt Transport 4% Skyworks Solutions 5%
Bank of New York Mellon -3% Johnson & Johnson 2% Southwest Airlines 9%
Capital One Financial -3% Johnson Controls 3% Starbucks 0%
Cree 0% Kansas City Southern 3% State Street 10%
Delta Air Lines 4% Kimberly-Clark -1% TD Ameritrade -3%
Discover Financial -8% Kinder Morgan -25% Travelers 21%
eBay 5% M&T Bank 1% U.S. Bancorp 1%
F5 Networks 2% McDonald’s 2% Union Pacific 7%
General Dynamics Pushed Morgan Stanley -17% United Rentals 6%
General Electric 2% Netflix 64% UnitedHealth 3%
Halliburton 7% PACCAR Pushed Verizon 0%

 

Financials last week were shown to still be having some issues as the number of banks that have reported earnings and missed expectations continues to increase. On the positive side last week, Netflix saw great numbers during the fourth quarter, as their self-made series continues to perform well and has received many accolades from the entertainment industry.  One final sector above to draw your attention to is the airlines industry, which saw solid but not stellar performance during the fourth quarter of 2014 as the price of fuel (an airline’s biggest expense) has come down as the price of oil has declined.

 

According to Factset Research, we have now seen 90 (18 percent) of the S&P 500 companies release their results for the fourth quarter of 2014. Of the 90 that have released, 79 percent have met or beaten earnings estimates and 21 percent have fallen short of expectations. This 79 percent of companies beating earnings expectations would represent the highest percentage since the third quarter of 2010 if the figure holds through the end of the reporting season. When looking at the revenue of the companies that have reported, 54 percent of the companies have beaten estimates while 46 percent have fallen short. We are still very early in the quarterly reporting season, but so far it has been a bit of a mixed bag.

 

The fourth quarter 2014 earnings season continues this week with more than 600 companies releasing their earnings results, in what is one of the busiest weeks for well known companies of the season. 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 move the markets highlighted in green:

 

3M Electronic Arts Lexmark International Sherwin-Williams
ADT Eli Lilly and Lockheed Martin Stanley Black & Decker
Altria Group Energizer Holdings Martin Marietta Materials Stryker
American Airlines Ethan Allen MasterCard Swift Transportation
American Electric Power Facebook McCormick & Company T. Rowe Price Group
Apple Ford Motor Microsoft Texas Instruments
AT&T Freeport-McMoRan Newell Rubbermaid Time Warner Cable
Autoliv General Dynamics Norfolk Southern Tractor Supply
Boeing Google Northrop Grumman Tuesday Morning
Bristol-Myers Squibb Hanesbrands Nucor Tyson Foods
Caterpillar Harley-Davidson Oshkosh United States Steel
Chevron Hershey Pfizer Visa
Coach Hess Praxair Weyerhaeuser
Colgate-Palmolive Ingersoll-Rand PLC Procter & Gamble Whirlpool
ConocoPhillips J & J Snack Foods PulteGroup Wynn Resorts
Corning Jacobs Engineering Raytheon Xcel Energy
D.R. Horton Kirby RLI Xerox
Dow Chemical Las Vegas Sands Seagate Technology Yahoo!

 

With such a large contingent of companies releasing their earnings this week it is hard to say which individual companies or sectors will see the most reaction. Visa and MasterCard will be very closely watched this week, much like American Express last week, as they span a wide range of transactions and have some of the best data on the spending habits of the US consumer. Technology giants Apple, Google and Microsoft all release this week with each company having the ability to move the markets should they either beat or miss market expectations. After this week we will likely have a much clearer picture as to the overall direction of this earnings season.

 

International News: International news last week was a flurry of major stories with the largest being the actions taken by the European Central Bank (ECB). For more than a year, ECB President Mario Draghi has been talking a big game when discussing and making announcements about how the ECB will help Europe. His speeches, where he outlined that the ECB will do “whatever it takes” to save the Euro and the union, have made numerous headlines, but until last week no concrete action had been taken. That all changed last week when the ECB announced its first full round of quantitative easing, aptly called QE1 Europe. The aim of the actions taken last week is to stem the start of outright deflation (falling prices) across the Eurozone and to help right the financial ship that has been listing badly over the past few quarters and years.ECB Balancesheet 1-26-15 In announcing that the ECB is starting to purchase bonds to the tune of 60 billion Euros per month through at least September of 2016, ECB President Draghi is undertaking a nearly identically sized round of quantitative easing as the US Federal Reserve did in its first round of QE. In total, the plan announced last week by the ECB will pump about 1.3 trillion Euros into the European economy over the next two years. But this seems unlikely to actually fix the underlying issues. Europe may be headed for deflation, but that is just one of the symptoms of a much bigger problem. Europe in general is not competitive on the global stage and has far too many entitlement programs that are among some of the most expensive in the world. They also have the problem of managing one currency for many countries at different stages of economic growth or decline. While a country can normally adjust their economy with exchange rate changes, this is not the case when everyone is tied together with a common currency such as the Euro. So while the actions taken last week are large, it really is just a very large Band-Aid and not a remedy for fixing the underlying problems of Europe, problems that may increase in light of the Greek elections.

 

Yesterday (Sunday in Greece), the general election was held for parliament and control of the Government of Greece. Syriza, the far left leaning political party that is against the austerity measures undertaken by previous Greek governments and the financial payments to the rest of Europe for bailout funds, took control in Greece. Syriza fell just two seats short of an absolute majority of 151 seats in parliament, winning 149 seats. However, this lack of full control was easily rectified when Syriza reached out and formed a coalition government with several of the independent politicians that also won seats on Sunday. The new Prime Minister of Greece, Alexis Tsipras, was sworn in on Monday and is already causing a lot of concerns in financial circles around Europe. As soon as the results were announced the Euro fell to the lowest level against the dollar since 2003, at $1.1098 per Euro. Fears about the value of the Euro are justified as there are also concerns that the changes the Syriza party promised in the run-up to the elections could cause a Greek debt default or, worse, could lead to Greece actively trying to leave the common currency. The fear that Greece could leave the Euro has already been reported in Germany where German Chancellor Merkel is said to be okay with Greece wanting to leave if it so chose, as reported by Der Spiegel. While it is still too early to see how Syriza will act towards the rest of Europe, one thing is for certain and that is the fact that with such a sizeable victory Syriza will feel embolden to take extreme actions.

 

The final international news headline last week came out of Saudi Arabia. It was the announcement of the death of King Abdullah who had been hospitalized for the past few weeks. The reason this is of concern to the global financial markets is that Saudi Arabia is the largest oil exporting country in the world and has the most influence on the price of oil. With the throne now having been transferred peacefully to King Salman the world will wait and watch to see if he will change the current Saudi stance on oil, which had been formulated under the previous king. The new king’s first speech indicated that the course will not change in regard to the price of oil, but as with any major political transition, things are bound to be reviewed and adjusted as the new ruler sees fit. The initial move on the price of oil when the announcement of the king’s death was made was to jump higher by about 3 percent, but this was quickly curtailed as traders seemed to like the announcement of no policy changes from the new king.

 

Market Statistics:

Index Change Volume
NASDAQ 2.66% Below Average
S&P 500 1.60% Below Average
Dow 0.92% Below Average

 

Volume last week was below average, even with a massive amount of global stimulus put into Europe. With the gains seen last week being obtained on lower volume than the declines we have seen over the past few weeks, the validity of the move comes into question. At this point, as mentioned above, all three of the major US indexes are in trading channels and look content moving in a wide range that is slightly upward biased going forward. Volatility remains high with the US equity markets reacting in large ways to what would otherwise be inconsequential headlines, a trend that is likely to continue in the near term.

 

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

 

Top 5 Sectors Change Bottom 5 Sectors Change
Technology 3.33% Home Construction -1.12%
Semiconductors 3.27% International Real Estate 0.08%
Oil & Gas Exploration 3.17% Healthcare 0.14%
Aerospace & Defense 2.98% Pharmaceuticals 0.42%
Broker Dealers 2.79% Basic Materials 0.55%

With the NASDAQ turning in such strong performance last week it was not surprising to see that the top two sectors of the markets in terms of performance were technology related. Semiconductors in particular continues to be one of the strongest sectors as it has been over the past year. One noticeable change last week in the sector performance was the positive move that put Oil & Gas Exploration into the top 5, despite the continuing decline in the price of oil. There appeared to be some bottom fishing going on among investors, pushing up the sector that one would think should move lower as oil continued to drop. Topping the bottom five performers last week was US Home Construction as we are in the seasonal period of time when housing typically slows and the US housing market looks like it had pulled a little ahead of itself over the past few months.

Fixed income moved higher last week as international investors moved out of fixed income within Europe as the ECB plan was unveiled and the Greek election outcome started to take shape:

Fixed Income Change
Long (20+ years) 1.19%
Middle (7-10 years) 0.16%
Short (less than 1 year) 0.00%
TIPS 0.46%

Last week the US dollar increased in value by 2.52 percent against a basket of international currencies as the world reacted to the move made by the ECB. With such massive stimulus being undertaken in Europe it was not surprising to see the US dollar become the “safe haven asset” for foreign investors as there is heightened uncertainty about the future movement of the Euro. The Japanese Yen turned in the second best performance of the week behind the US dollar. The Yen only declined by 0.04 percent against the US dollar over the course of the previous week. The weakest of the major global currencies last week was not the Euro, which slid 2.88 percent against the dollar, but the Australian dollar, which declined by 3.75 percent against the US dollar.

Commodities and metals were mixed last week and oil continued its downward slide:

Metals Change Commodities Change
Gold 1.40% Oil -7.21%
Silver 3.30% Livestock -5.64%
Copper 0.08% Grains -0.74%
Agriculture -2.81%

The overall Goldman Sachs Commodity Index turned in a loss of 3.18 percent last week, while the Dow Jones UBS Commodity Index declined by 2.20 percent. Oil was the deciding factor between the two indexes and the largest driver of the deviation in performance. Despite the quick move upward on the news of the Saudi King passing away, last week was a pretty dismal week for oil as it declined in excess of 7 percent. Both Gold and Silver made it three weeks in a row of gains with Gold moving up 1.40 percent, while Silver increased by 3.30 percent. The more industrially used Copper also increased last week, but its performance was a muted 0.08 percent gain. Livestock continued to slide last week and is now trading at the lowest level we have seen since August of 2013.

Despite an increase in the fighting in and around Eastern Ukraine last week, Russia managed to turn in the best performance of any of the major global indexes last week, gaining 6.10 percent on the MSCI Russia Capped Index. China, on the other hand, finally took a bit of a breather last week with the Shanghai Se Composite index turning in a loss of 0.73 percent over the course of the week. Prior to the small decline seen last week on the index, it had been 12 weeks since China experienced a weekly decline, which is by far the strongest index performance of the past three months.

After gaining nearly 20 percent two weeks ago, the VIX last week gave back all of the gains plus a little, moving lower by 20.48 percent over the course of the week. At this point it looks as if the latest spike on the VIX is now behind us, but that is not to say that something cannot come along and scare the markets once again, pushing the VIX right back up to the 22 level we have seen three times in the past month. At the current level of 16.66 the VIX is implying a move of 4.81 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 1/23/2015, returns in FSI’s hypothetical models* (net of a 1% annual management fee) were as follows:

Last Week Year to Date
Aggressive Model 1.04 % 1.89 %
Aggressive Benchmark 1.90 % 0.25 %
Growth Model 0.92 % 1.81 %
Growth Benchmark 1.47 % 0.21 %
Moderate Model 0.78 % 1.64 %
Moderate Benchmark 1.06 % 0.16 %
Income Model 0.65 % 1.57 %
Income Benchmark 0.53 % 0.09 %

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

 

We made no changes to our models over the course of the previous week. While we are almost fully invested, we remain invested in conservative investments that have not been going down as much as the indexes on down days and have been keeping pace with a majority of upside moves on days the markets move higher. The biggest opportunity we have been seeing recently continues to be energy, as evident by the jump higher in oil and gas exploration seen last week, but it still looks to be too early for this trade. India is another area we are looking at very closely for potential investment as the country under Prime Minster Modi has been making some very welcome changes over the past few months.

 

Economic News:  The focus of last week’s economic news releases was the US housing market and the releases came in almost exactly at market expectations across the board. There were no releases that significantly missed or significantly beat market expectations:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Neutral 1/20/2015 NAHB Housing Market Index January 2015 57 58
Neutral 1/21/2015 Housing Starts December 2015 1089K 1040K
Neutral 1/21/2015 Building Permits December 2015 1032K 1060K
Neutral 1/22/2015 Initial Claims Previous Week 307K 300K
Neutral 1/22/2015 Continuing Claims Previous Week 2443K 2400K
Neutral 1/23/2015 Existing Home Sales December 2015 5.04M 5.10M
Neutral 1/23/2015 Leading Indicators December 2015 0.50% 0.40%

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

 

Last week started off on Tuesday with the release of the NAHB Housing Market Index for the month of January, which came in one point under expectations, which was not enough to cause any concern. On Wednesday the second round of US housing related figures for the week were released and both housing starts and building permits for the month of December came in above 1 million units, a positive sign for the housing market. On Thursday the standard weekly unemployment related figures for the previous week were released with both figures coming in slightly above expectations, but much like the other releases of the week, not by enough to cause any sort of alarm. On Friday the final housing related figure of the week was released, that being the existing homes sales figure for the month of December, which came in north of 5 million units as expected by the markets. Wrapping up the week on Friday was the release of the Leading Economic Indicators (LEI) for the month of December, which came in at 0.5 percent as opposed to expectations of 0.4 percent for the month, another release deviation not large enough to be noticed by the markets.

 

This is a busy week for economic news releases as there are several releases that could impact the overall movement of the market. The focus of the week will be on US businesses and consumer spending. The release highlighted below has the potential to move the overall markets on the day it is released:

 

Date Release Release Range Market Expectation
1/27/2015 Durable Orders December 2015 0.50%
1/27/2015 Durable Goods -ex transportation December 2015 0.70%
1/27/2015 Case-Shiller 20-city Index November 2015 4.30%
1/27/2015 Consumer Confidence January 2015 95.5
1/27/2015 New Home Sales December 2015 450K
1/29/2015 Initial Claims Previous Week 301K
1/29/2015 Continuing Claims Previous Week 2430K
1/29/2015 Pending Home Sales December 2015 0.60%
1/30/2015 GDP-Adv. Q4 2014 3.20%
1/30/2015 Chicago PMI January 2015 58
1/30/2015 University of Michigan Consumer Sentiment Index January 2015 98.2

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

 

This week the economic news releases start on Tuesday with the release of the durable goods orders for the month of December, both including and excluding transportation. Expectations for these releases seem pretty high given the poor economic figures we saw on retail sales for the same month two weeks ago, but the durable goods orders figure can swing wildly with airplane orders as they are outsized purchases that can really drive the overall reading. Also released on Tuesday is the Consumer Confidence Index for January, which is expected to show a nice gain from 92.6 up to 95.5, a welcome change from the decline we saw in December. On Thursday the standard weekly unemployment related figures are set to be released with the expectation that both will have come down a little over the course of the previous week. On Friday the big release of the week is set to be released, that being the advanced GDP figure for the US economy during the fourth quarter of 2014. Expectations are for a decline from the 5 percent final reading for the third quarter of 2014 down to 3.2 percent growth. While this may seem like a large decline it is only a deceleration in growth and not a reversal of growth, so it should not garner that much of an adverse reaction if it is released to show 3.2 percent. Also released on Friday is the Chicago area PMI and the University of Michigan’s Consumer Sentiment Index, both for the month of January and both not expected to show much change over the readings seen in December. In addition to the above mentioned releases the FOMC rate decision will be released by the Federal Reserve on Wednesday, but it is unlikely there will be any changes; this is the reason for it being left off the table above.

 

Fun fact of the week—Greece: does the country matter?

Below is a table from the WSJ showing that there are 9 US cities or metro areas that produce more in terms of GDP than all of Greece combined.

Greece versus citie

 

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 1-20-2015

Commentary at a glance:

-All three of the major US indexes traded in a wild manner last week, ending the week lower.

-Switzerland dropped a bomb on the global financial markets.

-European Central Bank set to take action this week.

-The State of the Union address and US earnings will drive headlines this week.

-Economic news releases in aggregate came in below market expectations.

 

Market Wrap-Up: Last week saw a continuation of the slide we have been in during the first part of 2015, followed by a corrective bounce on Friday as bargain hunter investors took the stall in the decline of oil as a sign it was time to buy into the markets. The charts below are of the three major US indexes in green with their respective trading channels 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 with the red line:

4 charts 1-20-15

As you can see in the charts above, all three of the major US indexes broke down below their most recent trading channel in a technical sign that trouble may be on the horizon for the markets. Much of the decline last week was driven by the action taken by Switzerland and by fears of a sharper global contraction in growth than was first expected. On Friday, however, all three of the indexes made a valiant effort to regain their trading channels with the NASDAQ actually making it back into its channel and the Dow and S&P falling just a little short of returning to their channels. From a technical standpoint the NASDAQ (lower left pane above) is now the strongest of the three major indexes, with the S&P 500 (upper left pane above) and the Dow (upper right pane above) almost exactly tied for second. The VIX is doing something we have not seen for a while; it is moving upward in an almost consistent trend. Over the past year we have seen the VIX move higher a number of times, but generally in the form of spikes higher followed by drastic declines in the days following the spikes. This time, however, we have seen the VIX slowly but steadily move higher since the middle of December. There have been sharp moves higher or lower over this timeframe, but the clear trend is that the VIX is moving higher. It looks like we could be headed for a year of increased volatility, anticipated by many investment professionals on the heels of such a calm year during 2014. Throughout 2014, only 29 days closed above 17 on the VIX. To date in 2015, all 11 trading days have seen the VIX close above 17. Going forward, much of the movements in the markets will depend on the actions taken by central banks and hopefully the actions that will be undertaken will be a little less abrupt than those of Switzerland last week.

 

National News: National news last week was pretty quiet as there was little movement on anything in Washington DC and most investors were watching the carnage in Europe, which was much more exciting than usual. This week on Tuesday evening, however, President Obama gives his State of the Union address before a joint session of Congress and the media. Typically, the State of the Union addresses lofty goals and sets high expectations as the US President tries to bridge both sides of the aisle and appeal to the average American, while behind the scenes there is little intention of the various parties working together. This year will likely not be any different, as the President will hit on the high points from the past year, including the decline in the unemployment rate and growth within the US economy. He is also likely to threaten to veto several pieces of legislation that are currently in the works on the Hill and call for tax reform that will reduce tax breaks for the richest Americans and corporations. Finally, there will likely be many jokes about everything from his time in Hawaii and the wedding he caused to get moved last minute to the upcoming Presidential election in 2016. In the end, based on past States of the Union speeches for third year, second term presidents, none of what is said in the speech is likely to make any difference on future policy, yet many will still tune in for the address. While the world digests everything the President says Tuesday evening, corporate America will be moving forward with the fourth quarter earnings season, which is now underway.

 

Earnings season officially started last week and Alcoa kicked things off along with the major banks. Below is a table of the well known companies that released earnings last week with earnings that missed expectations highlighted in red, while earnings that beat expectations by more than 10 percent are highlighted in green:

 

Alcoa 27% CSX 0% Kinder Morgan Pushed
Bank of America 3% Goldman Sachs 2% Lennar 10%
BlackRock 3% Intel 12% Schlumberger 2%
Charles Schwab 4% JPMorgan Chase -8% Skyworks Solutions Pushed
Citigroup -33% KB Home -48% Wells Fargo 0%

 

Alcoa kicked things off last week with a nice beat on its earnings and a projection of an overall 7 percent increase in aluminum during 2015, which is pretty upbeat given the various economic stages we see countries in around the world. The big banks were the major group that released earnings last week and they were mixed at best. Citigroup and JPMorgan Chase were the two big losers of the week, both falling far short of market expectations, with trading being pointed to at both firms as a major reason for the miss. Bank of America, Goldman Sachs and Wells Fargo all turned in results that were very close to expectations, but showing weakness going forward and anticipating a lot of uncertainty moving forward in Europe. Overall, it looks like the fourth quarter earnings season is starting off weaker than most would have liked, but not weak enough to cause alarm.

 

The fourth quarter 2014 earnings season is fully underway this week with more than 200 companies releasing their earnings results. Below is a table of 39 of the better known companies releasing their earnings this week, with the releases that have the most potential to move the markets highlighted in green:

 

Alaska Air Honeywell International Precision Castparts
American Express IBM SanDisk
Baker Hughes J B Hunt Transport Skyworks Solutions
Bank of New York Mellon Johnson & Johnson Southwest Airlines
Capital One Financial Johnson Controls Starbucks
Cree Kansas City Southern State Street
Delta Air Lines Kimberly-Clark TD Ameritrade
Discover Financial Kinder Morgan Travelers
eBay M&T Bank U.S. Bancorp
F5 Networks McDonald’s Union Pacific
General Dynamics Morgan Stanley United Rentals
General Electric Netflix UnitedHealth
Halliburton PACCAR Verizon

 

Companies that tend to be more consumer oriented will be in the earnings spotlight this week, with companies like McDonald’s, Netflix, Starbucks and American Express all announcing. American Express will be closely watched as it deals with millions of financial transactions over the course of a quarter and may have a good feel for the overall health of the US economy. McDonald’s will be under a lot of scrutiny this week as the first set of results of major changes at the chain have now been implemented and we will see how everything is going. One thing to watch for on all of the above releases is the impact, if any, they anticipate going forward from weakness in Europe, as European markets are a significant source of revenue for many of the companies.

 

International News: International news last week was very busy with the majority of the news being less than positive for the global financial markets. Early last week the World Bank released its semiannual Global Economic Prospects in which it lowered its expectations for global growth during 2015 from 3.4 percent (projected in June 2014) all of the way down to 3.0 percent. The reasons for the decline were the drop in oil prices, uncertainty in Europe and deflationary fears in Europe and Japan. The report goes on in great depth to look at all regions of the global economy and to provide forecasts for each, with India and China seeing the two fastest growth rates in 2015, those being 6.4 and 7 percent respectively. Interestingly enough, the report also projects out to 2017 and in 2017 the World Bank has the economic growth rate in India overtaking that of China for the first time ever. As one would expect, the report shows the two different speeds at which the global economy is growing with the US leading the way higher, but at a slower pace, and the majority of the rest of the developed world dragging behind. Overall, the developed world is expected to see 2.2 percent growth, while the developing world is expecting to see 4.8 percent. While the World Bank’s report is very important and many investors use the report to formulate investment decisions in the future, the real news story last week was Switzerland and the actions it took on Thursday.

 

On Thursday, Switzerland did something almost entirely unexpected and that was to drop the peg it had been defending of the Swiss Franc to the Euro for the past few years. The peg was put in place on the Swiss Franc to make it trade closer to the Euro than it otherwise would have in a truly free market. When the peg was adopted, the Swiss National Bank (SNB) essentially said it would hold the exchange rate between the Euro and the Swiss Franc near 1.22 by either buying or selling Swiss Francs in large quantities to ensure this position. On Thursday, however, it abandoned this policy and allowed the Swiss Franc to freely trade against the Euro. This caused the Swiss Franc to appreciate against the Euro to the tune of 41 percent almost instantly before the trade settled down with a gain of more than 18 percent for the week. This is the largest single day move in a developed country’s currency that I could find looking back in recent history. The single news release from the SNB on Thursday made investors and banks around the world lose billions of Euros as trades had to be unwound. In Switzerland, everything went up in price and did so in a big way, with the people of Switzerland perhaps being hit the hardest as the goods they export became far too expensive for many people in Europe and as their debts in Swiss Francs became that much harder to pay. Adding to the hardship that SNB put on the people of Switzerland, it also lowered the interest rates being held on deposit with the SNB down to -0.75 percent. That is correct, the SNB currently has a negative interest rate in Switzerland and the SNB said it would take the rate even lower if needed in the future. The rate of the Swiss 10-year bond briefly hit 0.04 percent shortly after the announcement. The fallout was extreme in some areas due to the revaluation of the currency, but no greater than in the foreign exchange markets, which saw many individual investors wiped out by a single holding in their accounts. Several well known foreign exchange trading platforms closed down as did several major hedge funds, and the majority of the fallout from the move is unknown as of yet. So why did the SNB take such drastic actions?

 

The European Central Bank (ECB) will meet on Thursday this week and most people think it will outline a massive quantitative easing program that will hopefully kick start the European economy. This program will obviously not be good for the Euro as it will likely weaken as the ECB throws money at its financial problems by effectively printing money. The Swiss, were this to happen, would have had to buy massive amounts of Euros to keep the exchange rate peg at 1.22. The costs could easily have gone into the tens of billions of Euros for Switzerland and this was just too much for Switzerland to handle. Switzerland saw the costs of doing what it did, about 70 billion Euros, as much easier to deal with than the unknown of having to buy weak Euros in the near future. The Swiss may also have concerns about the upcoming elections in Greece and what may happen within that country should the more extreme factions of the political spectrum in the country gain power. Whatever the reason, Switzerland did significant damage to its economy, its people and its reputation by taking the actions it did on Thursday. How can any investors trust a central bank in the future when on Monday of last week one of the head people at the SNB showcased the currency peg as a “corner stone” of Switzerland’s economy policy going forward, only to blow it up, literally, later during the same week? Here in the US we may not always agree with the Federal Reserve, but at least the Federal Reserve provides its thoughts on actions for the future far in advance, so no one can claim it was a surprise to them.

 

Market Statistics: Volume was above average last week as the markets moved lower during the second full trading week of 2015:

 

Index Change Volume
S&P 500 -1.24% Above Average
Dow -1.27% Above Average
NASDAQ -1.48% Average

 

The US markets continued to trade wildly last week as they have done throughout the start of 2015, with large intraday point moves in both positive and negative directions. In general, the markets seem to be lacking any real motivation to move steadily either one way or the other and are consequently getting hung up in very small investment stories that are moving the markets much more than they otherwise would. Volume on the whole last week was above average, but we did have a major options expiration date on Friday, which really helped boost volume on the three major indexes.

 

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 3.43% Broker Dealers -6.65%
Utilities 2.62% Home Construction -5.67%
Telecommunications 2.45% Financial Services -4.01%
Consumer Staples 2.03% Regional Banks -3.03%
Infrastructure 1.71% Insurance -2.78%

With the markets moving lower for the third week in a row it was not surprising to see that the sectors that performed the best last week were the defensive equity sectors of the markets. Real Estate and Utilities led the way higher, while other defensives such as Infrastructure and Consumer Staples rounded out the top five of the best performing sectors. On the flip side, anything related to financials seemed to really have a tough week last week after the big banks released their earnings, which were in line for the most part, but showed weakness in the highly profitable areas such as fixed income and equity trading.

Fixed income moved higher last week as international investors moved out of fixed income within Europe as rates plunged after Switzerland’s move on its currency cap:

Fixed Income Change
Long (20+ years) 1.62%
Middle (7-10 years) 1.02%
Short (less than 1 year) 0.02%
TIPS 0.64%

Last week the US dollar increased in value by 0.86 percent against a basket of international currencies as the world reacted to the move made by the SNB. The Swiss Franc turned in the best performance of the week—and the best performance over its existence—last week, gaining more than 18 percent against the value of the US dollar, thanks to the removal of the peg to the Euro. The weakest of the major global currencies, not surprisingly, was the Euro as it declined 2.38 percent against the value of the US dollar over uncertainty about the upcoming ECB actions and the move by the Swiss.

Commodities and metals were mixed last week:

Metals Change Commodities Change
Gold 4.49% Oil 1.59%
Silver 7.48% Livestock -3.50%
Copper -5.13% Grains -5.08%
Agriculture -2.74%

The overall Goldman Sachs Commodity Index turned in a loss of 1.25 percent last week, while the Dow Jones UBS Commodity Index declined by 0.85 percent. Both gold and silver made it two weeks in a row of gains with Gold seeing one of its strongest weeks in a long time, moving up 4.49 percent while Silver jumped higher by 7.48 percent. The more industrially used Copper bucked the trend and moved lower over the course of the week for the second week in a row, giving up 5.13 percent last week. Livestock continued to slide last week and is now trading near the lowest levels we have seen over the past 12 months. Oil, as mentioned above, gained a little in what looked like investors trying to time the bottom of the oil market. Some of the support last week seems to have perhaps been the expiration of futures contracts, but we will have to wait and see if the bottom put in last week is the true bottom for oil markets or if it is just a pause in the greater downward trend.

Germany saw the best performance globally last week as the Frankfurt based Dax Index advanced 5.38 percent over the course of the week, a week that saw all of the European markets move higher except for Switzerland on hopes that the ECB will be announcing a major round of quantitative easing this week. Australia saw the worst performance on the international front last week with the Sydney based All Ordinaries Index declining by 2.97 percent on fears that the global economy may be growing more slowly during 2015 that first thought.

Last week the VIX was at it once again, jumping nearly 20 percent during the course of the week and that included a decline of more than 6.4 percent on Friday. Volatility has really made a comeback so far during 2015. Looking back at 2014 there were only 29 days that saw the VIX close above the 17 level. So far during 2015 all of the 11 trading days we have seen have been above the 17 level on the VIX. At the current level of 20.95 the VIX is implying a move of about 6.05 percent over the course of the next 30 days and, as always, the direction of the move is unknown.

For the ending on 1/16/2015, returns in FSI’s hypothetical models* (net of a 1% annual management fee) were as follows:

Last Week Year to Date
Aggressive Model 0.27 % 0.84 %
Aggressive Benchmark -0.45 % -1.62 %
Growth Model 0.34 % 0.86 %
Growth Benchmark -0.35 % -1.24 %
Moderate Model 0.38 % 0.88 %
Moderate Benchmark -0.25 % -0.89 %
Income Model 0.47 % 0.91 %
Income Benchmark -0.12 % -0.43 %

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

 

We made no changes to our models over the course of the previous week. We continue to see strong performance relative to our benchmarks as well as many of the major world indexes. While we are almost fully invested we remain invested in conservative investments that have not been going down as much as the indexes on down days and have been keeping pace with a majority of upside moves on days the markets move higher. The biggest opportunity we have been seeing recently has been energy, but with the way in which oil has been declining and the lack of any real support or actions that seem to be on the horizon to reverse the course, it still looks too early to make any initial investments into the sector.

 

Economic News:  The focus of last week’s economic news releases was the US consumer and the releases overall came in below market expectations. There were two releases that significantly missed market expectations and no releases that significantly beat market expectations:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Negative 1/14/2015 Retail Sales December 2014 -0.9% -0.2%
Negative 1/14/2015 Retail Sales ex-auto December 2014 -1.0% 0.0%
Neutral 1/14/2015 Business Inventories November 2014 0.2% 0.4%
Neutral 1/15/2015 Initial Claims Previous Week 316K 295K
Neutral 1/15/2015 Continuing Claims Previous Week 2424K 2400K
Neutral 1/15/2015 PPI December 2014 -0.3% -0.5%
Neutral 1/15/2015 Core PPI December 2014 0.3% 0.2%
Slightly Positive 1/15/2015 Empire Manufacturing January 2015 9.9 5.0
Slightly Negative 1/15/2015 Philadelphia Fed January 2015 6.3 10.0
Neutral 1/16/2015 CPI December 2014 -0.4% -0.4%
Slightly Negative 1/16/2015 Core CPI December 2014 0.0% 0.1%
Neutral 1/16/2015 University of Michigan Consumer Sentiment Index January 2015 98.2 95.0

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

 

Last week started out on Wednesday with some bad figures out about retail sales during the month of December, a crucial time for retailers. Overall, retail sales were shown to have declined by 0.9 percent, while the market had been looking for a much more muted decline of 0.2 percent. The bigger surprise is that once auto sales were removed from the retail sales number, sales were shown to have declined by a full 1 percent, while the market had been expecting a zero print. This decline in sales during the holiday season is very concerning as a large percentage of the US economy is based on the US consumer spending money. We will have to see if a trend develops in January or if the December number was just a fluke. On Thursday there were several economic news releases that were fully ignored, thanks to the once in a lifetime move by Switzerland. The standard unemployment related figures were released with both coming in a little higher than anticipated, but not by enough to cause alarm. The Producer Price Index (PPI) showed that overall prices declined, while core prices advanced slowly. On the manufacturing front the Empire Manufacturing index for January came in stronger than anticipated while the Philly Fed index came in weaker, having a bit of an offsetting effect on the day. On Friday, heading into a holiday weekend, the Consumer Price Index (CPI) showed overall prices at the consumer level to have declined by 0.4 percent, while the core CPI number (CPI excluding food and fuel) was shown to be flat during January. The week wrapped up on Friday with the release of the University of Michigan’s Consumer Sentiment Index for the month of January, which came in a little higher than it was in December. Let’s hope this increase in consumer sentiment translates into more spending rather than “confident” individuals continuing to sit on cash as this would help the US economy very little.

 

This is a slow week for economic news releases as there is only one release that realistically has the potential to move the markets. The focus of the week will be on the US Housing market. The release highlighted below has the potential to move the overall markets on the day it is released:

 

Date Release Release Range Market Expectation
1/20/2015 NAHB Housing Market Index January 2015 58
1/21/2015 Housing Starts December 2015 1040K
1/21/2015 Building Permits December 2015 1060K
1/22/2015 Initial Claims Previous Week 300K
1/22/2015 Continuing Claims Previous Week 2400K
1/23/2015 Existing Home Sales December 2015 5.10M
1/23/2015 Leading Indicators December 2015 0.40%

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

 

Having a slow week for economic news releases after what we went through last week is a welcome relief. This week starts off on Tuesday with the release of the US government Housing Market Index, which is expected to show a slight increase from 57 up to 58. On Wednesday more housing related figures are released with the release of housing starts and building permits for the month of December, both of which are expected to be over 1 million units. On Thursday the standard weekly unemployment related figures are set to be released with both figures expected to show a slight decrease over last week’s figures. On Friday the existing homes sales figure for the month of December as well as the Leading Economic Indicators (LEI) report are both set to be released. Existing home sales for December are expected to come in north of 5 million homes, which would be on pace with what we have seen over the past few months and a positive sign for the US economy. The LEI report is an aggregation report of many economy indicators. With a gain of 0.4 percent being expected it really should not be a market moving new release. However, if the release comes in with a negative reading it could move the market lower. All eyes this week will be on the ECB, as mentioned above, with its press conference and decisions about how to stimulate the European economy.

 

Fun fact of the week—Switzerland

 

The International Committee of the Red Cross (ICRC) was founded in 1863 in Geneva, Switzerland, and is still based there. The flag of the Red Cross is the flag of Switzerland with the colors inverted.

 

Source:Eupedia.com

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