For a PDF version of the below commentary please click here weekly-letter-2-13-2017

Commentary quick take:

 

  • Major developments:
    • Rally continues
    • 84 consecutive days of no declines 1 percent or greater
    • 4th quarter earnings season continues to look good
    • All three indexes closed at all-time highs this week

 

  • US:
    • Earnings season drove performance
    • Several cabinet positions were approved
    • Fed is waiting on changes from the administration
    • Three rate hikes likely this year
    • US government lost in appeals court
    • Trump went after Nordstrom on Twitter, but failed

 

  • Global:
    • All central bank meetings took no action last week
    • Greece made headlines
    • Germany seems less likely to bailout Greece again

 

  • Technical market view:
    • All three indexes broke above new trading channels
    • VIX had a tame week

 

  • Hybrid investments strategy update:
    • No changes over the previous week
    • Positions have been performing as expected
    • Coca-Cola released earnings

 

  • This week for the markets:
    • Fed chair Yellen’s testimony on Capitol Hill
    • Trump: what will he do next?
    • Earnings season winds down further

 

  • Interesting Fact: Sweet hearts around the world.

 

Major theme of the markets last week: The rally continues!

market-rally-2-13-17

The current rally in the US financial markets is skating on pretty thin ice. While the market continues to advance without a single day of a pullback in excess of 1 percent and there are a lot of factors that could continue to push the markets higher, history would suggest otherwise. Markets typically do not move in one direction and one direction only. There are typically small pull backs, even during large rallies. One thing some market technicians watch is the number of days between daily declines of 1 percent or more on the major indexes. Looking at the market levels as of the close on Friday, there have been 84 consecutive days since the S&P 500 or the Dow had a decline of 1 percent or more on a single day. While this is not unheard of, it is becoming rarer as time goes by. The last time we had more than 84 consecutive days of market movements without a decline of 1 percent or greater was November 24th, 2006. Both the S&P 500 and the Dow ran for 94 trading days before they saw a decline of 1 percent on November 27th, 2006. The NASDAQ, being technology heavy, is a more actively moving index and has currently only gone 45 days without a decline of 1 percent or more. For those of you who may be interested, the longest run of days without a 1 percent decline for the Dow is 116 days (ending September 20th, 1993) and for the S&P 500, 110 days (ending May 18th, 1995). So, while the rally could continue, it is be becoming highly likely that at some point the market will stumble, even if only a little and for a short time.
US news impacting the financial markets:

 

Earnings reports were the primary driver of market performance last week as they were strong and seemed to be showing a resilient and very confident US consumer. Last week was the fifth week of fourth quarter earnings releases and, in aggregate, earnings continued to be better than expected. Below is a table of the well-known companies that released earnings last week, with earnings that missed expectations highlighted in red, while earnings that beat expectations by more than 10 percent are highlighted in green:

 

Advance Auto Parts pushed General Motors 12% Panera Bread 3%
Allergan 3% Gilead Sciences 14% Pioneer Natural Resources 63%
Aptargroup 5% Hasbro 28% Prudential Financial 6%
Archer Daniels Midland -6% Humana 1% Sysco 7%
Arrow Electronics -1% Jack Henry & Associates 1% Time Warner 5%
Brinks 23% Kellogg 8% Twitter 73%
Buffalo Wild Wings -29% Level 3 Communications 36% Tyson Foods 25%
CBRE Group 16% Maximus 15% Walt Disney 5%
CenturyLink -4% Mondelez International -4% Western Union 9%
Church & Dwight 5% Newell Brands 0% Whole Foods Market 0%
Coca-Cola 3% News Corp 6% Yelp 333%
CVS Health 2% O’Reilly Automotive 2% Yum! Brands 10%
Dunkin’ Brands 7% Pandora Media 25% Zillow Group 267%

 

Online technology companies saw some of the best figures last week, in terms of beating expectations, as both Yelp and Zillow beat expectations by more than 250 percent. Much of the percentage gain was due to the very low and near zero expectations going into reporting. Twitter also handedly beat expectations for earnings per share by 73 percent last week, while at the same time missing revenues expectations and lowering forward guidance for earnings. Twitter stock tumbled more than 11 percent the day following the announcement as revenues and revenues expectations drove the stock much more than the earnings figure. Pandora rounded out the online technology companies that beat expectations last week, besting expectations by 25 percent, thanks to increased subscriber numbers during the quarter. Consumer Staples was also a major group to report earnings last week as Tyson Foods beat expectations and saw its stock price recover some following the announcement of a federal subpoena looking into price fixing. Coca-Cola announced earnings that were in line with expectations, despite seeing its fourth consecutive year of declining sales volume. Church & Dwight and Kellogg both turned in strong results in the consumer staple space. Whole Foods met market expectations, but made some waves during its conference call as it lowered its expectations for future growth and actually announced the closure of 9 stores nationally over the next few months. The company has long been struggling with trying to lose the stigma of “whole paycheck,” which is used to describe how expensive it is for the average person to buy groceries from Whole Foods. So far, the changes the company has made to its business over the past year have not been as successful as hoped in changing consumer minds about the company.

 

According to Factset Research, we have seen 357 (71 percent) of the S&P 500 companies release their results for the fourth quarter of 2016. Of the 357 that have released, 67 percent have beaten earnings estimates, while 11 percent have met expectations and 22 percent have fallen short of expectations. When looking at revenue, of the companies that have reported, 52 percent of the companies have beaten estimates, while 48 percent have fallen short. The overall growth rate that we have seen so far for S&P 500 earnings for the fourth quarter currently stands at 5.0 percent, which is a significant amount above the 3.1 percent that was expected at the end of 2016. Of the companies that have reported earnings, there have been 82 companies that have issued forward looking guidance for the first quarter of 2017. Of the 82 companies that have released forward guidance, 57 have issued negative earnings expectations, while only 25 have issued positive guidance.

 

This is the sixth full week of trading during which fourth quarter earnings are being released. The number of easily recognized companies reporting earnings this week continues to decline and we are starting to see more of a shift toward consumer facing companies reporting. The table below shows the companies that have the greatest potential to move the markets highlighted in green:

 

Agilent Technologies CubeSmart J M Smucker
Barnes Group Dean Foods Molson Coors Brewing
Bloomin’ Brands Deere & Co Owens & Minor
Cabela’s Denny’s PepsiCo
Caesars Entertainment Dr Pepper Snapple Group Time
Campbell Soup First Data T-Mobile
CBS Flowserve VF Corp
Cisco Systems Fossil Group Waste Management
Cooper Tire & Rubber Groupon Wendys

 

After Coca-Cola posted declining volumes last week, investors will be closely watching Pepsi to see if it is a more wide spread phenomenon or just something going on with Coke. Deere & Company is another company that the markets will watch closely as its heavy machinery is used in many different applications around the world, providing a great indicator for how the overall industrial sector is doing. T-Mobile will be followed closely as investors are trying to figure out if T-Mobile’s new unlimited data and unlimited talk plans are actually attracting new customers or if the company is still losing customers to competitors, as has been the trend in recent quarters. Earnings will not be the only driving force behind the market movements as politics continues to play into the mix.

 

Several more members of the Trump cabinet were approved last week with most of the approvals coming by very narrow margins. In the case of the Secretary of Education, a tie had to be broken by the Vice President himself, who cast the 51st vote in favor of Betsy DeVos. After a rough confirmation hearing for Secretary DeVos, her first day on the job proved to be just as challenging; protestors blocked her from entering a public school in the Washington DC area and hurried both her and her security detail back to their vehicles before they sped off. The President had a few setbacks during the week as well as the 9th circuit court of appeals upheld a lower court’s ruling that blocked Trump’s immigration order. This provided a bit of a pop to the airline stocks, which had been hit following the announcement of his select country immigration ban. President Trump took to Twitter, as he has many times in the past, and said that the Department of Justice will be taking the case to the Supreme Court, which is currently evenly divided down party lines four to four and could very well end up with a hung decision on the immigration ban unless Trump’s Supreme Court nominee can be confirmed in time to be on the case, which seems unlikely. Something unusual also happened this week after President Trump launched a personal attack on Nordstrom via Twitter for dropping his daughter’s clothing line. The stock price actually went up and went up by more than 4 percent following his negative tweet. This is a first as the previous times President Trump has gone after a specific company on Twitter, its stock moved significantly lower.

 

Global news impacting the markets:

 

Global news last week continued to seemingly be on hold as the world waits to see what will actually come out of Washington DC once the initial wave of actions is complete. This includes trade agreements that will need to be reworked now that the TPP and NAFTA are in the cross sights of President Trump, which could drive global market performance. For their part, even the central banks that held meetings last week took no action, choosing to wait and see how things develop in the US before making any changes. The central banks that met last week include the Bank of New Zealand, Bank of Australia and the Bank of India. There was, however, a story that popped up that has surfaced many times in the past and was largely ignored by the financial markets this time around—Greece.

 

Greece continues to struggle with the debt burden it is carrying. This was made glaringly clear last week as the IMF released its bi-annual report on the economic situation in Greece. In boiled down terms, Greece is still very much in debt and the debt is, once again, quickly getting out of control. At this point, Greece is in need of another tranche of its promised bailout funds to make the payment on its previous bailout agreement. If Greece does not receive the bailout funds, it will likely default on some of its debts. Germany, this time around, does not appear to be in the mood to offer any more olive branches to Greece as the head of the Free Democrats Party (FDP) has called for Greece to leave the Eurozone rather than receive any more money in the form of bailouts. While this type of call would typically be ignored, as it has in the past by politicians in both Germany and the Eurozone overall, it cannot be ignored any more as the FDP looks like they could legitimately win this year’s election in Germany. If the FDP does win the election in Germany, they could form a coalition government that is very much focused on doing what is best for Germany and it could mean the cessation of funding some of the less economically viable countries in Europe. Currently, the IMF is not a creditor to the situation with Greece, which has some countries a little upset. To the IMF’s credit, it has said that it would like to loan Greece money, but that Greece currently doesn’t meet the necessary economic requirements to qualify for any loans.

 

Technical market review:

 

With the breakouts that occurred on the three major indexes over the past three weeks, we have redrawn trading channels this week (yellow lines below). All of the trading channels are sloped upward, with the fastest slope seen on the NASDAQ, while the slowest slope is seen on the Dow. The red line on the VIX chart remains the 52-week average level of the VIX, which the index is currently solidly below.

4-charts-combined-2-13-17

The indexes technically confirmed their breakouts above the previously drawn trading ranges (horizontal ranges) last week on both the Dow and the S&P 500, which led us to redraw the trading channels this week. Even the most current trading channels drawn above were broken out of to the up side on both the S&P 500 (upper left pane above) and the Dow (upper right pane above), while the NASDAQ ended the week almost directly at the upper level of its trading channel. From a technical perspective, the current markets look strong and could continue to keep moving higher as earnings season starts to come to an end and Washington DC works on picking up the pace of growth in the economy. The VIX (lower right pane above) continues to signal that everything is fine with the markets and it will be relatively smooth sailing for at least the next 30 days. However, as we have seen in the past, the VIX can jump on a moment’s notice for a wide variety of reasons.

 

Hybrid model performance and update

For the trading week ending on 2/10/2017, returns in the hybrid hypothetical models* (net of a 1% annual management fee) were as follows:

 

Last Week 2017 YTD Since 6/30/2015
Aggressive Model 0.90% 1.84% 7.25%
Aggressive Benchmark 0.53% 3.66% 3.47%
Growth Model 0.73% 1.79% 6.33%
Growth Benchmark 0.42% 2.85% 3.00%
Moderate Model 0.55% 1.62% 5.27%
Moderate Benchmark 0.30% 2.04% 2.42%
Income Model 0.51% 1.54% 5.00%
Income Benchmark 0.15% 1.04% 1.52%
Quant Model 0.46% 6.35%
S&P 500 0.81% 3.45% 12.26%

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

 

There were no changes to the hybrid models over the course of the previous week. Positioning remains tilted toward areas of the market that should benefit the most from potential new administration actions that will try to get the economy growing faster. We had several companies report earnings last week on the individual equity holdings, but there was nothing surprising or notable in any of the releases. This week there are a few of the remaining individual equity positions that will report earnings. Owens and Minor (OMI) will be watched very closely to see if the company provides any insight into any adverse impact we could see on its stock price due to the changes to or dismantling of the Affordable Care Act, which is supposed to be the number one agenda item of Republicans on Capitol Hill following all of the nomination hearings that are still ongoing.

 

Market Statistics:

 

The rally continued last week for the markets thanks to strong reported earnings and a few comments by the President about taxes:

 

Index Change Volume
NASDAQ 1.19% Average
Dow 0.99% Average
S&P 500 0.81% Average

 

Volume remained average last week, which is a little unusual in the middle of earnings season. All three indexes made new all-time highs in tandem at several points during the week last week, ending the week at the highest levels ever seen.

 

The following were the top 5 and bottom 5 performers over the course of the previous week:

 

Top 5 Sectors Change Bottom 5 Sectors Change
Software 2.39% Financials -0.12%
Aerospace & Defense 2.21% Oil & Gas Exploration -0.14%
Pharmaceuticals 1.98% Natural Resources -0.28%
Home Construction 1.89% Energy -0.47%
Multimedia Networking 1.87% Telecommunications -0.81%

 

The sectors that performed the best last week included several sectors that had been lagging behind the other sectors over the past month: Software, Aerospace and Defense, Pharmaceuticals and Multimedia Networking. Much of the gains in these four sectors appeared to be market timers trying to buy sectors of the markets that have the largest potential to outperform as they play catch up with the broad indexes. Home Construction was the odd man out in the positive sectors last week as the sector has been performing relatively well over the past several months. The primary driving force behind the positive move in the sector last week was the continued strength of the very large home builders such as DR Horton and Lennar Homes. On the negative side last week, Energy hit two of the sectors despite a rally in oil prices on Friday. Financials made the list of negative performers last week thanks to uncertainty over how deregulation will be handled by the new administration. There is little doubt that it will be coming, but investors are now trying to figure out how it will be accomplished. Telecommunications was the worst performing sector of the markets last week, in large part due to Globalstar, which declined by 14 percent for the week after the abrupt announcement that the President and Chief Operating Officer was stepping down immediately.

 

After several weeks of bonds meandering lower here in the US, last week they turned around and jumped higher, with the long end of the curve seeing the most price movement, while the short end saw the least, as is expected. Much of the move was due to the unlikely nature of the Fed being able to increase rates before at least the June meeting.

 

Fixed Income Change
Long (20+ years) 1.48%
Middle (7-10 years) 0.40%
Short (less than 1 year) 0.02%
TIPS 0.33%

Global currency trading volume was finally back to normal levels following several weeks of various holidays closing some markets around the world. Overall, the US dollar gained 0.97 percent against a basket of international currencies, as there was a general lack of political torpedoes fired at the US dollar last week from any members of the new administration. The best performing of the global currencies last week was the Egyptian Pound, which gained 4.7 percent against the US dollar, as Egypt continues to try to open its financial markets to global investors. The worst performance among the global currencies was seen in the Norwegian Krone, as it declined by 1.9 percent against the value of the US dollar.

Commodities were mixed last week as the metals turned in solid gains, while the soft commodities were mixed:

Metals Change Commodities Change
Gold 1.27% Oil -0.35%
Silver 2.72% Livestock -0.81%
Copper 6.67% Grains 3.62%
Agriculture 0.00%

The overall Goldman Sachs Commodity Index advanced 0.38 percent last week. Oil declined 0.35 percent, during and even after a report came out on Friday that signaled that the OPEC freeze/production cut seems to be holding after the first round of reported numbers from the group were released. Metals were positive last week as Gold advanced 1.27 percent, while Silver gained 2.72 percent and the more industrially used Copper jumped 6.67 percent; the wild swinging movements in the price of Copper continue. Soft commodities were mixed last week, with Agriculture flat overall (perfectly flat on a point-to-point calculation from the previous week, despite intraweek movement), while Livestock declined 0.81 percent and Grains posted gains of 3.62 percent.

Top 2 Indexes Country Change Bottom 2 Indexes Country Change
Caracas General Venezuela 17.45% FTSE MIB Italy -1.33%
WIG Poland 3.57% RTS Index Russia -2.20%

Last week was a good week for global financial markets as 83 percent of the markets posted gains over the course of the week. The best performing index last week was found in Venezuela, with the Caracas General Index turning in a gain of 17.45 percent for the week. Much of the gains last week on the index could be attributed to the OPEC deal holding up and not endangering the price of oil. The worst performing index last week was found in Russia, the RTS Index, which turned in a loss of 2.20 percent as Russian President Putin seems to be taking more and more action in Ukraine and amassing more troops at the border. While President Trump has said that he would like a better relationship with Russia than the US has had recently, he is unlikely to go along with Russia going on yet another land grab without there being consequences.

The VIX had a lazy week last week, declining by 1.09 percent overall, but in general it was a smooth trading week for the fear gauge. The VIX has now been showing persistent complacency for several months and it does not look like this will change any time soon, as all of the new ideas that the administration would like to implement to try to get the economy growing faster are far more than 30 days out. The current reading of 10.85 implies that a move of 3.13 percent is likely to occur over the next 30 days. The direction of the move over the next 30 days is unknown.

Economic Release Calendar:

 

Last week was tied for being the slowest week for economic news that we have seen over the past year, with only one release that could have impacted the markets and even it didn’t have a noticeable impact when it was released:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Slightly Negative 2/10/2017 University of Michigan Consumer Sentiment Index February 2017 95.7 97.9

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

 

The only economic news release that was released last week came out on Friday and was the University of Michigan’s Consumer Sentiment Index for the month of February (first estimate). The release indicated that sentiment declined slightly during the first two weeks of February when compared to the ending value for January. There were four speeches given by Fed officials last week, but in aggregate they said nothing that was not already known by the markets and had little if any impact on the overall markets.

 

With last week being such a slow week, this week will seem very busy on the economic calendar, but it is really just an average week for economic news releases. The releases that have the largest potential to move the markets on the day they are released are highlighted in green below:

 

Date Release Release Range Market Expectation
2/14/2017 PPI January 2017 0.30%
2/14/2017 Core PPI January 2017 0.20%
2/15/2017 Core CPI January 2017 0.20%
2/15/2017 CPI January 2017 0.30%
2/15/2017 Empire Manufacturing February 2017 7
2/15/2017 Retail Sales January 2017 0.10%
2/15/2017 Retail Sales ex-auto January 2017 0.40%
2/16/2017 Housing Starts January 2017 1220K
2/16/2017 Building Permits January 2017 1230K
2/16/2017 Philadelphia Fed February 2017 17.5

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

 

This week the economic news releases start on Tuesday with the release of the Producer Price Index (PPI) for the month of January. Both the overall PPI and the core PPI are expected to show virtually no inflation as both are expected to print near three tents of a percent increase. The Consumer Price Index (CPI) will be released on Wednesday and both overall CPI and core CPI are also expected to post very little gains in January. If both PPI and CPI numbers print as low of figures as expected, it will continue to show that inflation is currently not a problem for the US economy and it will also provide leeway for the Fed to remain at these very low rates for an even longer period of time. Typically, ultra-low interest rates cause inflation to run high, thus forcing the Fed to raise rates in an attempt to cool things off, but so far this cycle the low rates have failed to cause inflation in the US economy. Perhaps more important, on Wednesday the latest retail sales figures for the month of January will be released with expectations of very slow sales growth of only 0.1 percent overall and 0.4 percent when excluding transportation. If these numbers turn out to be correct it would signal a meaningful slowdown from the 0.6 percent growth that we saw in December, despite much of the December growth being due to the holiday shopping season. We need to see retail sales numbers increasing at a faster pace to have the US economy fully on sure footing. Also released during the day on Wednesday is the latest reading for the Empire Manufacturing index for the month of February, which is expected to show little change from the 6.5 reading in January, as it is expected to post a reading of 7, signaling slow but steady expansion in manufacturing in the greater New York area. On Thursday, two housing related figures are set to be released, the housing starts and building permits figures, both for the month of January and both expected to be right about 1.2 million units. If the numbers are close to these two releases, the markets should largely ignore them. Wrapping up the week this week on Thursday is the release of the Philadelphia Fed Index for the month of February, which is expected to show that manufacturing and business conditions slowed down from the fast expansion seen in January, but are still expanding nicely in the region. In addition to the economic news releases of this week, there will be some closely watched testimony before Congress by Fed Chair Yellen as she is giving her biannual state of the US economy update to Congress. The question and answer period in both chambers is always the most interesting, but she may give some hints as to her current thinking and what, if any, impact it could have on future Fed rate hikes.

 

Interesting Fact Sweet hearts around the world.

 

According to the National Confectioners Association, there are about 8 billion little candy hearts sold each Valentine’s Day. With each heart being about half an inch in width, that is enough hearts to circle the earth two and a half times.

 

Source: http://www.candyusa.com

For a PDF version of the below commentary please click here weekly-letter-2-6-2017

Commentary quick take:

 

  • Major developments:
    • First Fed meeting of 2017
    • 4th quarter earnings season passed the half way point
    • Dow fell back below 20,000 then managed to claw back above

 

  • US:
    • No change in the Fed Funds rate
    • Fed statement seems to be signaling slow growth
    • Fed is waiting on changes from the administration
    • Three rate hikes likely this year
    • Trump continues to quickly move forward
    • Earnings season was little changed last week
    • Unemployment ticked up one tenth of a percent
    • Wage growth slowed

 

  • Global:
    • UK Parliament gives thumbs up to Brexit
    • Bank of England holds rates steady
    • Bank of Japan holds rates steady
    • German election this year could get interesting

 

  • Technical market view:
    • All three indexes broke down then back up
    • VIX jumped higher then pushed right back down

 

  • Hybrid investments strategy update:
    • No changes over the previous week
    • Almost done with earnings reports

 

  • This week for the markets:
    • Super Bowl hangover
    • Earnings are starting to wind down
    • Trump: Can he continue at his current pace?

 

  • Interesting Fact: What did people eat during the Super Bowl?

 

Major theme of the markets last week: First Fed meeting of 2017

funny-2-6-17

Any time there is a meeting of the Federal Reserve’s Open Market Committee (FOMC) here in the US, investors around the world take note and await the policy outcome, even when there is virtually no chance of the Fed raising rates going into the meeting. Last week was the first FOMC meeting of 2017 and the Fed did not raise rates, but that still didn’t stop everyone from watching and reading the policy statement. The statement last week was among those with the fewest changes we have seen in a policy statement when compared to the previous meeting’s outlook. The Fed is obviously still in a holding pattern, awaiting material changes from the new administration that either positively or negatively affect the US economy. So far, the Fed has not seen any. It still looks like the FOMC wants three rate hikes in 2017, with the hikes likely coming once in the first half of the year and twice in the second half. It is likely that the final hike will be at the December meeting, which will be the second to last meeting with Janet Yellen as the Chair of the Federal Reserve.


US news impacting the financial markets:

 

US news last week continued to focus on the three prevailing topics of the past several weeks: President Trump, Federal Reserve and fourth quarter earnings. President Trump continued the break neck pace that he has been on since taking office, signing a number of executive orders that have hard, wide sweeping impacts. The immigration ban on seven primarily Muslim countries received the most outrage last week, having a negative impact on the US airline industry and airlines around the world. Feathers were ruffled in DC over Trump’s pick for the Supreme Court and several other pieces of legislation signed during the week. It wasn’t all negative for the President last week as Congress did approve several of his key nominations, including the Secretary of State. News also came out on Friday that Trump’s hardball tactics had worked with Lockheed Martin, as the F35 Joint Strike fighter saw its overall price tag decline by more than $700 million, a savings of more than $100 million compared to Trump’s goal of having the overall bill cut by at least $600 million. Team Trump was not the only group that was busy in DC last week as the Federal Reserve’s FOMC held its February meeting (first meeting of 2017) on Tuesday and Wednesday last week, culminating in no change in the Fed funds rate.

 

As expected, the Fed decided to hold off on raising interest rates at this first meeting of the year. Without a press conference following the conclusion of the meeting, it was highly unlikely that a policy shift would be made in light of the potential changes coming out of Washington DC under the new administration. The statement from the FOMC was nearly identical to the statement released at the conclusion of the December meeting in terms of the Fed’s immediate outlook. The Fed noted the steady growth in the economy and did not anticipate much that would either speed up economic growth or cause it to stall. When discussing inflation, the statement pointed toward the increasing consumer and business sentiment as reasons for why the economy will likely see the Fed target inflation rate of 2 percent achieved in the first half of 2017. As for the number of rates expected, the expectations following the meeting were unchanged at three expected rate hikes during 2017.

 

Last week was the fourth week (half way mark) of earnings season for the fourth quarter of 2016 and the results were mixed, in terms of companies beating their expected earnings levels. 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:

 

Advanced Micro Devices 0% ConocoPhillips 32% Pfizer -6%
Aetna 12% Electronic Arts 14% Philip Morris -1%
Aflac -6% Eli Lilly -4% Phillips 66 -59%
Allstate 35% Energizer 21% Ralph Lauren 13%
Amazon.com 10% Exxon Mobil 25% Sprint -50%
Ameriprise Financial 12% Facebook 12% Tractor Supply 2%
Apple 4% GoPro 33% Tuesday Morning -51%
Ball 1% Harley-Davidson -16% Under Armour -8%
Callaway Golf -6% Hershey 8% United Parcel Service -3%
Chipotle Mexican Grill 2% Ingersoll-Rand -9% Visa 10%
Clorox 2% ManpowerGroup 6% Weyerhaeuser -7%
CME Group 4% Mastercard 1% Xcel Energy 2%
Coach 3% New York Times 30% Xerox 0%

 

When looking at the companies that released earnings last week, it was a very mixed bag of results, with companies either seeming to really beat expectations or falling very short. The energy sector saw some of the largest division last week as Exxon turned in a solid fourth quarter, which saw some of its cost cutting measures finally start to pan out. Phillips 66, on the other hand, missed expectations by nearly 60 percent as the company failed to capitalize on the rising oil prices seen during the start of the quarter. Under Armour once again posted slowing growth across the board and was handed a decline of nearly 20 percent the following day as the company continues to pivot from high growth to more sustainable lower growth. Technology giants Amazon, Facebook and Apple all turned in good results, which were rewarded with mixed results in the stock price the following day. UPS struggled during the holiday season as the company saw an average number of packages for the holiday shopping season, but saw its margins decrease, thanks to self-shipping from some competitors such as Amazon. Visa and MasterCard both turned in solid results for the fourth quarter as transactions seemed to be picking up for both companies, even if the value of the transactions declined slightly. Overall, Trump had positive impact on corporate America, according to the earnings calls that occurred over the previous week, but that impact has been somewhat limited as management at many companies take a wait-and-see approach to the new administration.

 

According to Factset Research, we have seen 276 (55 percent) of the S&P 500 companies release their results for the fourth quarter of 2016. Of the 170 that have released, 65 percent have beaten earnings estimates, while 12 percent have met expectations and 23 percent have fallen short of expectations. When looking at revenue, of the companies that have reported, 52 percent of the companies have beaten estimates, while 48 percent have fallen short. The overall growth rate that we have seen so far for S&P 500 earnings for the fourth quarter currently stands at 4.6 percent, which is a significant amount above the 3.1 percent that was expected at the end of 2016. In terms of which sectors of the market have been producing the best earnings reports, the Information Technology sector has seen 88 percent of the companies that have reported earnings beat expectations, while healthcare has seen 77 percent of companies beat expectations. Currently, the worst performing sectors in terms of earnings are Telecom Services (0 percent) and Real Estate (36 percent). If the earnings season were to end at this point for the fourth quarter it would be viewed as a positive quarter, but one that held a lot of uncertainty regarding the future under the new administration.

 

This is the fifth full week of trading during which fourth quarter earnings are being released. Now that we are past the halfway mark for earnings season, we increasingly see fewer of the easily recognized companies reporting their results. The table below shows the companies that have the greatest potential to move the markets highlighted in green:

 

Advance Auto Parts General Motors Panera Bread
Allergan Gilead Sciences Pioneer Natural Resources
Aptargroup Hasbro Prudential Financial
Archer Daniels Midland Humana Sysco
Arrow Electronics Jack Henry & Associates Time Warner
Brinks Kellogg Twitter
Buffalo Wild Wings Level 3 Communications Tyson Foods
CBRE Group Maximus Walt Disney
CenturyLink Mondelez International Western Union
Church & Dwight Newell Brands Whole Foods Market
Coca-Cola News Corp Yelp
CVS Health O’Reilly Automotive Yum! Brands
Dunkin’ Brands Pandora Media Zillow Group

 

This week the reporting companies start to move toward the consumer sector as several larger retailers and consumer brands report. Coca-Cola will likely be closely watched as it is one of the most iconic brands in the world. General Motors will be focused on a little more than normal this quarter, with interest in what management has to say about the new administration and any potential impact some of the new policies will have on the company’s margins. Whole Foods Market has some lofty expectations for a company that is trying to transform itself into a grocery store that everyone can shop at, rather than being a grocery store that only wealthy people can afford. Overall this week, it would take a pretty big surprise for any of the companies reporting earnings to have a noticeable impact on the overall markets.

 

Global news impacting the markets:

 

There were several topics that made global financial headlines last week and had a noticeable impact on the financial markets. The first included two key central bank meetings other than the FOMC meeting in the US: the policy meetings of the Bank of England (BOE) and the Bank of Japan (BOJ). Much like the meeting of the FOMC here in the US, there were little expectations of any rate movement at either of the central bank meetings and they did not disappoint, choosing to make changes to forecasts rather than changes to monetary policy. The BOE decided to raise its inflation target for 2017 from 1.4 percent up to 2 percent, while at the same time lowering its outlook for unemployment in the UK by half of a percent down to 4.5 percent. The BOE also kept its stimulus program in place and continued to highlight the uncertainty of the situation surrounding the Brexit as a potential major threat to the economy of the UK. The BOJ took much the same course of action as the BOE in that it increased its outlook for growth in the economy from 1 percent up to 1.4 percent. The BOJ kept its target inflation rate at 2 percent and kept its stimulus program alive and well. Unlike the BOE, however, its target rate for monetary policy is a -0.1 percent as it is still embarking on a NIRP (negative interest rate policy) in order to keep its economy growing. Aside from policy meetings of central banks last week, the other focus in the international media was on politics, particularly politics in Europe.

 

The discussions of the Brexit took a turn for the government last week after the Supreme Court of England two weeks ago said that Parliament should have a say in the Brexit decision. Parliament last week voted to move forward with the Brexit. While there are still several other votes that will have to be cast in favor of Brexit by politicians, the main Parliament vote last week that passed seemed to be the vote PM May was most concerned about. With the passage of the vote, PM May announced that she is still shooting for an end of March date to trigger article 50 of the Lisbon treaty, which starts the two year clock on negotiations between the UK and the EU on how to part ways in the most amenable way possible. Germany could also become more interesting as it looks more and more likely that current Chancellor Merkel will not be able to retain the Chancellorship of Germany following the German elections held later this year. The nationalist movement is gaining steam in Germany and looks to be strong enough to overthrow the current government. France is almost in the same situation, other than the current President Francois Hollande has announced that he will not seek reelection and therefore technically can’t lose in the upcoming French elections. Marie Le Pen is currently leading in some of the polls in France, charging hard from the far right with a promise of French “freedom” from the rest of Europe. The nationalist right wing movement seems to still be gaining steam in Europe after seeing how voting turned out here in the US and in the UK.

 

Technical market review:

 

All three of the major US indexes broke down initially last week, falling in most cases back into their respective technical ranges only to break back out at the end of the week. The S&P 500 and the Dow still have their trading ranges drawn with yellow parallel lines as the breakouts are still relatively new. The trading channel for the NASDAQ also remains as we wait to see if the index can remain meaningfully above the channel. The red line on the VIX chart remains the 52-week average level of the VIX, which the index is currently solidly below.

4-charts-combined-2-6-17

In terms of technical strength, the NASADQ (lower left pane above) and the S&P 500 (upper left pane above) are virtually tied, while the Dow (upper right pane above) is slightly behind. This comes after the Dow was much stronger than the other two indexes during much of the Trump bump following the election results. The VIX, after touching a multiple year low two weeks ago, moved higher at the start of the week last week, only to come right back down and end the week little changed when compared to where it started. Chopping seems to be the name of the game at this point for the US financial markets as they wait patiently for any new meaningful developments out of Washington DC that could have longer term ramifications on both the economy and business here in the US.

 

Hybrid model performance and update

For the trading week ending on 2/3/2017, returns in the hybrid hypothetical models* (net of a 1% annual management fee) were as follows:

 

  Last Week 2017 YTD Since 6/30/2015
Aggressive Model -0.10% 0.95% 6.30%
Aggressive Benchmark 0.13% 3.12% 2.93%
Growth Model 0.04% 1.08% 5.57%
Growth Benchmark 0.10% 2.42% 2.57%
Moderate Model 0.14% 1.09% 4.71%
Moderate Benchmark 0.08% 1.74% 2.11%
Income Model 0.20% 1.05% 4.49%
Income Benchmark 0.05% 0.89% 1.36%
S&P 500 0.12% 2.62% 11.36%
Quant Model 1.57% 5.88%  

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

 

There were no changes in any of the hybrid models over the course of the previous week. There was some downward movement in a few of the individual equity positions held in the models as earnings were reported, but none of the reports were cause for alarm. In an interesting change of events from an investment standpoint, we have started to see more and more of a rotation back into the lower beta stocks in the markets. These are likely investors who like the dividend payments in combination with the lower volatility than the overall market, since they are still not able to find good fixed income yields without stretching out into the junk sections of the fixed income market.

 

Market Statistics:

 

Last week seemed like a bit of a breather week for the US financial markets as it was a week of sideways movement for the major indexes, ultimately ending in mixed results:

 

Index Change Volume
S&P 500 0.12% Average
NASDAQ 0.11% Average
Dow -0.11% Average

 

Volume last week was average when compared to the weekly volume that we have seen on the three broad indexes over the past year. Had it not been for some very heavy volume days on some technology companies following their earnings results, we probably would have seen a lighter than average week in terms of volume. When earnings season is fully under way, volume on the indexes overall can be moved based on who is reporting what results and what impact their results could have on others.

 

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
Pharmaceuticals 4.69%   Oil & Gas Exploration -0.95%
Biotechnology 3.27%   Materials -1.09%
Healthcare 2.46%   Energy -1.10%
Medical Devices 2.21%   Transportation -2.18%
Semiconductors 1.69%   Telecommunications -3.33%

 

After being beaten down for the past several weeks, following talks in Washington DC about drug prices being set by the government, Pharmaceuticals and Biotechnology stocks last week turned in a strong week with each sector gaining more than 3 percent. The strong performance in the two sectors helped lift the overall performance of Healthcare into the third best performing spot for the week. Medical Devices took fourth place in a sort of rising tide in Healthcare raising all boats in related trade. Semiconductors rounded out the top five spots thanks to better than anticipated results from a few of the larger companies in the industry. On the negative side last week, Oil and Gas Exploration, Materials and Energy took three of the bottom five spots as investors seemed to be pulling profits following the nice upward moves in the sector riding on the back of the Trump euphoria. Transportation was hit last week, coming in second to the bottom, thanks to a nose dive in the airline stocks on the back of the Muslim travel ban enacted by President Trump. Telecommunications took the bottom spot last week as earnings continued to struggle for the sector.

 

With the Fed meeting that occurred this week, it was not surprising to see that there was some movement in the yields of US fixed income. We saw what is known as a flattening of the yield curve, which occurs when the long end of the curve moves lower, while the shorter end and middle of the yield curve is moving upward.

 

Fixed Income Change
Long (20+ years) -0.31%
Middle (7-10 years) 0.24%
Short (less than 1 year) 0.02%
TIPS -0.12%

Global currency trading volume last week was very low due to the Lunar New Year. Overall, the US dollar declined 0.81 percent against a basket of international currencies, as different members of the new administration presented very different views on how strong or weak the US dollar should be in order to help the economy. The best performing of the global currencies last week was the Turkish Lira, which gained 4.7 percent against the US dollar, as the Turkish currency received a nice upward pull from its stock market. The worst performance among the global currencies was seen in the UK Pound, as it declined by 0.5 percent against the value of the US dollar over continued fears over what could be ahead for the Brexit.

Commodities were almost all positive last week; only Copper turned in a loss:

Metals Change   Commodities Change
Gold 2.33%   Oil 1.23%
Silver 2.16%   Livestock 0.45%
Copper -2.96%   Grains 0.03%
      Agriculture 0.00%

The overall Goldman Sachs Commodity Index advanced 0.84 percent last week. Oil advanced 1.23 percent, during a week that saw tensions building between the US and several countries in the Middle East. Metals were mixed last week as Gold advanced 2.33 percent, while Silver gained 2.16 percent and the more industrially used Copper declined 2.96 percent, as the wild swinging movements in the price of Copper continued. Soft commodities were positive last week, with Agriculture overall flat, while Livestock gained 0.45 percent and Grains posted gains of 0.03 percent.

Top 2 Indexes Country Change   Bottom 2 Indexes Country Change
BIST 100 Turkey 5.44%   CASE 30 Egypt -2.18%
S & P BSE Sensex India 1.28%   Nikkei 300 Japan -2.48%

Last week was a difficult week for global financial markets as only 29 percent of the markets posted gains over the course of the week. The best performing index last week was found in Turkey, with the BIST 100 Index turning in a gain of 5.44 percent for the week. Much of the gains last week on the index could be attributed to the rising value of the Lira and the progress the government continues to make in further opening up the country to foreign investment. The worst performing index last week was found in Japan, the Nikkei 300 Index, which turned in a loss of 2.48 percent as fears over trade wars between the US and some key trading partners seemed to really have a negative impact on the primarily export driven economy of Japan.

While the VIX ended the week with a very modest gain of only 3.69 percent last week, it was a much wilder ride if you look at the intraday movements of the VIX. At one point last week the VIX was up more than 20 percent over the course of less than two hours, only to see the large increase fade away as the day went on. The current reading of 10.97 implies that a move of 3.17 percent is likely to occur over the next 30 days. The direction of the move over the next 30 days is unknown.

Economic Release Calendar:

 

Last week, the economic calendar was very busy as we had the full battery of employment related figures as well as the first FOMC meeting of 2017. Overall, the economic news releases of the week were skewed toward being more positive than negative:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Neutral 1/30/2017 Personal Income December 2016 0.30% 0.40%
Neutral 1/30/2017 Personal Spending December 2016 0.50% 0.40%
Neutral 1/31/2017 S&P Case Shiller Home Price Index November 2016 5.30% 5.00%
Negative 1/31/2017 Chicago PMI January 2017 50.3 55
Neutral 1/31/2017 Consumer Confidence January 2017 111.8 112.5
Positive 2/1/2017 ADP Employment Change January 2017 246K 165K
Neutral 2/1/2017 ISM Index January 2017 56.0 55.0
Neutral 2/1/2017 FOMC Rate Decision February Meeting 0.63% 0.63%
Positive 2/3/2017 Nonfarm Payrolls January 2017 227K 170K
Positive 2/3/2017 Nonfarm Private Payrolls January 2017 237K 175K
Neutral 2/3/2017 Unemployment Rate January 2017 4.80% 4.70%
Neutral 2/3/2017 ISM Services January 2017 56.5 57

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

 

The economic news releases started on Monday last week with the release of personal income and spending, both for the month of December and both coming in very close to market expectations, thus leading to little market reaction. On Tuesday, the Case-Shiller Home Price index posted a solid 5.3 percent annualized gain through November for the US housing market, which caused a bit of a bump in real estate related stocks during the day. The Chicago PMI for the month of January was already released on Tuesday and missed expectations, posting a reading of 50.3, which is just barely above the 50 level of inflection between growth and contraction in the manufacturing sector in the area. Wrapping up the day on Tuesday was the release of the latest reading of consumer confidence, as measured by the government, which showed little change for the month of January when compared to December levels. Wednesday was a busy day as the day started with the release of the ADP employment change index for the month of January, which handedly beat markets expectations, causing some economists to adjust their expectations for the government employment related figures that were to be released on Friday. The overall ISM index for the month of January was also released on Wednesday morning, but came in very close to market expectations and had little notable impact on the overall markets. The big news of the day on Wednesday was the conclusion of the FOMC meeting with the policy statement being released. There was no change in the Fed funds rate and the statement was also little changed, making a pretty clear case that the Fed would like to maintain a course of action of increasing rates three times during 2017. The Fed is, as mentioned above, hedging its bets a little, waiting to see how some of the new administration plays out in the economy before taking any meaningful movement on rates. Friday was a very busy day, as it typically is during employment week, as the government released its 42 pages on information related to employment here in the US for the previous month. Nonfarm payroll public and private figures were some of the best figures that we have seen in a number of years, with construction seeing a large uptick in employment. There were, however, some interesting downward revisions to the December payroll figures, dropping each figure by more than 20,000 jobs when compared to what was first released. Overall, the unemployment rate here in the US ticked up to 4.8 percent from 4.7 percent. Underneath the headline figures, there were some interesting figures released as wage growth was shown to have slowed down to a nearly nonexistent level in January and the labor force participation rate ticked up slightly to 62.9 from the December level of 62.7. Overall, in looking at all of the data about the employment situation here in the US that was released on Friday, it looks like the employment market is still improving, but doing so at a painfully slow pace. There is, however, no indication that unemployment will spike upward any time soon, rendering it less likely that the Fed will need to include it in its calculation for when to increase rates next.

 

After such a busy week last week with all of the employment related figures released, this week only holds a single economic news release and it is not one that typically impacts the overall markets:

 

Date Release Release Range Market Expectation
2/10/2017 University of Michigan Consumer Sentiment Index February 2017 0.40%

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

 

This week the sole economic news release is released on Friday and is the University of Michigan’s Consumer Sentiment Index for the month of February (first estimate). Expectations are for the figure to be little changed from the elevated levels we saw at the end of January. Currently, there seems to be a lot of hope from consumers that all of the actions President Trump has undertaken will all work out for the better.

 

Interesting Fact What did you eat during the Super Bowl?

 fun-fact-2-6-17

On Friday last week, Google Trends released its compilation of the most searched recipes by state leading up to the Super Bowl. For us here in Colorado, the winner is Queso Dip. It is surprising how many states saw cupcakes as the top recipe for the Super Bowl.

 

Source: Google Trends https://t.co/iKM1oICj4U

For a PDF version of the below commentary please click here weekly-letter-1-30-2017

Commentary quick take:

 

  • Major developments:
    • Trump’s first full week in office
    • 4th quarter earnings season doing well
    • Dow cracks 20,000 for the first time

 

  • US:
    • Speculation about the February Fed FOMC meeting
    • Executive orders have been enacted on several topics
    • Insurance is posting a very strong fourth quarter
    • Trump makes phone call to Russian President Putin

 

  • Global:
    • UK Supreme Court rules against government
    • Parliament in UK to play Brexit role
    • Lunar New Year Holiday

 

  • Technical market view:
    • All three indexes broke out to the upside
    • Dow overtook the 20,000 level
    • VIX is at its lowest point since July of 2014

 

  • Hybrid investments strategy update:
    • No changes over the previous week
    • Fourth quarter earnings season is going well
    • Investing is more about managing risk than returns
    • 2016 performance review

 

  • This week for the markets:
    • Fed FOMC meeting this week
    • Earnings for the fourth quarter of 2016
    • Washington DC, will they go along with Trump?

 

  • Interesting Fact: Presidential signature: right-handed, left-handed, or both?

 

Major theme of the markets last week: Bull market rages onward

dow-20k-1-30-17

The 20,000 level for the Dow has finally fallen, having taken more than 17 years to double from the 10,000 point level seen back in March of 1999. It looked like we could see a run at 20,000 on the Dow late last year and the indexes came very close at one point, but it took until after the inauguration in the new year to finally break through. Some pundits have begun calling for a top in the market now that the 20,000 psychological level has been breached, while others are saying that this is only the beginning. Currently, the main discrepancies between opinions lay in disagreements over whether the Trump tactics of lowering taxes and increasing government spending will actually be enough to push the US economy forward. The fourth quarter GDP figure for the US released last week seemed to indicate weakness when compared to the third quarter. However, this underlying weakness is currently being overridden by the strength that we have seen on the hopes surrounding the new administration.

 

US news impacting the financial markets:

Last week, several different topics played a role in the overall movement of the financial markets. The topics of interest were the upcoming Fed meeting, the Trump Administration and fourth quarter earnings season. Any time there is a Federal Reserve meeting, the global markets stop and take notice as actions by the US Federal Reserve can have very far reaching impacts on global financial markets. Although the markets are giving a less than 4 percent chance of a rate hike at this week’s meeting, it was still a main topic of discussion last week. Consensus is that Chair Yellen will not announce a rate hike, yet the language may change to be a little more hawkish, in that she may remove the word “measured” from the context of raising rates in the future. This would likely signal that she is getting much closer to moving on increasing rates and that when the Fed does move, there will be several successive moves to get the Fed funds rate back to a “normal long-term run rate.” If she does surprise the markets with a rate hike or does not change the language in the statement enough to look more hawkish, the meeting and the outcome could be taken negatively by the markets. One of the biggest factors in the Fed’s thinking behind when to raise rates has to be the impact the Trump administration could have on the US economy.

rate-hike-cartoon-1-30-17

The first full week of work for President Trump is in the books and thus far he does not seem to be doing anything other than what he pledged to do on the campaign trail. Through his use of executive orders he has made some sweeping changes in terms of regulations and federal government employees. He has also brought up some politically difficult topics, such as term limits and banning elected officials from working for lobbyist firms after their terms in office. President Trump also had a busy week with foreign heads of state as he met with UK PM May at the White House, had a meeting cancelled by Mexico’s President and held a phone conversation with Russia President Putin over the weekend. The US financial markets seemed to look on without much fear of the new administration having a negative impact on the markets. This is likely due to all of the actions taken last week being well known and having little immediate overall financial impact on the economy. The far more difficult and potentially impactful decisions of the administration lie ahead, to which the markets will undoubtedly react. While it was the first full week for President Trump, the fourth quarter earnings season was well into its third full week.

 

Last week was the third week of earnings season for the fourth quarter of 2016 and the results were mixed, in terms of companies beating their expected earnings levels. 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% Freeport-McMoRan -22% Raytheon 1%
Abbott Laboratories 2% General Dynamics 3% RLI 19%
Alphabet -1% Halliburton 100% Sherwin-Williams 5%
Arthur J Gallagher 0% Honeywell International 0% Southwest Airlines 7%
AT&T 0% Intel 5% Stanley Black & Decker 2%
Baker Hughes -150% J & J Snack Foods 13% Starbucks 0%
Boeing 6% Johnson & Johnson 1% Stryker 1%
Bristol-Myers Squibb -5% Kimberly-Clark 2% Swift Transportation 0%
Capital One Financial -9% Las Vegas Sands -5% Texas Instruments 9%
Caterpillar 28% Lockheed Martin 7% Travelers 22%
Chevron -66% McDonald’s 2% United Rentals 16%
Colgate-Palmolive 0% Meredith 7% United Technologies 0%
Dow Chemical 13% Microsoft 5% Verizon Communications -3%
Eastman Chemical 2% Northrop Grumman 7% Western Digital 20%
eBay -6% PayPal 0% Whirlpool -4%
Ford Motor -6% Progressive 22% Yahoo! 29%

 

In looking at the data from the companies that reported earnings last week, there were a few clear trends; one such trend was in insurance. Three large insurance companies, Travels, Progressive and RLI; all handily beat earnings expectations for the fourth quarter as there were an abnormally small number of natural disasters during the quarter. Large energy companies had a difficult week as Chevron and Baker Hughes posted tough losses, while Halliburton seemed to be turning the corner on rising oil prices faster than many of its competitors. Defense contractors posted solid figures, but in their various investor and analyst calls pointed out potential issues in the near term from some of the changes that President Trump could push for. Much like he has been for the previous several weeks, President Trump was a hot topic for many of the analyst calls about fourth quarter earnings, especially when management was speaking about future conditions, as there are hardly any areas of business immune to impact from some of the President’s potential policies.

 

According to Factset Research, we have seen 170 (34 percent) of the S&P 500 companies release their results for the fourth quarter of 2016. Of the 170 that have released, 65 percent have beaten earnings estimates, while 13 percent have met expectations and 22 percent have fallen short of expectations. When looking at revenue, of the companies that have reported, 52 percent of the companies have beaten estimates, while 48 percent have fallen short. The overall growth rate that we have seen so far for S&P 500 earnings for the fourth quarter currently stands at 4.2 percent, which is a significant amount above the 3.1 percent that was expected at the end of 2016. In terms of which sectors of the market have been producing the best earnings reports, the Information Technology sector has seen 88 percent of the companies that have reported earnings beat expectations. Currently, the worst performing sector in terms of earnings is the Real Estate sector, which has seen zero companies beat earnings expectations. This number is a little misleading, however, since there have only been 2 real estate companies that have reported this early in earnings season.

 

This is the fourth full week of trading during which fourth quarter earnings are being released. The number of companies releasing their earnings greatly increases this week with more than 1,000 companies posting results. The table below shows the companies that have the greatest potential to move the markets highlighted in green:

 

Advanced Micro Devices ConocoPhillips Pfizer
Aetna Electronic Arts Philip Morris
Aflac Eli Lilly Phillips 66
Allstate Energizer Ralph Lauren
Amazon.com Exxon Mobil Sprint
Ameriprise Financial Facebook Tractor Supply
Apple GoPro Tuesday Morning
Ball Harley-Davidson Under Armour
Callaway Golf Hershey United Parcel Service
Chipotle Mexican Grill Ingersoll-Rand Visa
Clorox Manpower Group Weyerhaeuser
CME Group MasterCard Xcel Energy
Coach New York Times Xerox

 

Big oil companies will be one of the focal points this week in earnings reports as Exxon and ConocoPhillips both report their results as well as a number of smaller oil companies. Apple and Amazon will receive a lot of the spotlight this week as they report their results, primarily because of the holiday shopping season that occurred during the fourth quarter. Some of the more traditional brick and mortar stores have already reported less than stellar sales and everyone is waiting to see if Amazon was the company that took their sales. Apple is always a market moving earnings release because it has such a significant weighting in many of the technology indexes, but in general, analysts will be watching for the iPhone sales figures as well as the adoption rate figures of some of the company’s newer technologies. Two other releases that the market will likely be watching closely this week include MasterCard and Visa as the two credit card companies combined account for a majority of all credit cards transactions here in the US. They typically have great information about consumer spending and patterns and could potentially provide some insight into the confidence figures we have been seeing about the US consumer.

 

Global news impacting the markets:

 

Global financial news last week was light as Brexit continued to be one of the hottest topics in the global financial markets. The only real announcement about the Brexit last week came from the UK Supreme Court, which issued an opinion that Prime Minster May did not have the authority to invoke Article 50 of the Lisbon treaty without the consent of parliament. While the PM was hoping the court would rule in her favor, she said that a vote by parliament would not derail the schedule to attain the desired start of the two-year clock on the UK leaving the EU in March. While she seems confident that she will have the number of votes needed to move forward, political commentators who focus on UK politics seem less certain. There were very few items of interest released in Asia last week as it was the week leading up the Lunar New Year, which is celebrated in many Asian countries with several of the exchanges closed multiple days this week.

 

Technical market review:

 

All three of the major US indexes managed to break out to the upside from their previous trading ranges and channels last week. The S&P 500 and the Dow still have their respective trading ranges drawn with yellow parallel lines as the breakouts are very new. The trading channel for the NASDAQ also remains as we wait to see if the index can remain meaningfully above the channel. The red line on the VIX chart remains the 52-week average level of the VIX, which the index is currently solidly below.

4-charts-combined-1-30-17

As mentioned above, the S&P 500 (upper left pane above), the Dow (upper right pane above) and the NASDAQ (lower left pane above) all broke out above their technical ranges last week. In breaking above, the Dow finally managed to break through and close above the psychological 20,000 level for three days in a row. With such a sharp single day move followed by two days of the markets moving sideways, we will have to wait a little while longer to make sure that the breakouts of the major indexes will hold and that they are not just temporary movements in an otherwise sideways moving market. While the equity indexes were pushing higher, the VIX was moving in the opposite direction, pushing to the lowest level that we have seen since July of 2014.

 

Hybrid model performance and update

For the trading week ending on 1/27/2017, returns in the hybrid hypothetical models* (net of a 1% annual management fee) were as follows:

 

  Last Week 2017 YTD Since 6/30/2015
Aggressive Model 0.67% 1.04% 6.39%
Aggressive Benchmark 1.18% 2.99% 2.79%
Growth Model 0.55% 1.02% 5.50%
Growth Benchmark 0.92% 2.32% 2.47%
Moderate Model 0.40% 0.93% 4.54%
Moderate Benchmark 0.66% 1.66% 2.03%
Income Model 0.30% 0.83% 4.25%
Income Benchmark 0.33% 0.84% 1.32%
S&P 500 1.03% 2.50% 11.22%

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

 

There were no changes to the hybrid models over the course of the previous week as the models had been designed several weeks ago for the changes the administration pursued last week. Earnings so far for the individual equity positions in each of the hybrid models have been doing well with most companies beating expectations and looking solid moving forward. Key themes for the models—Deregulation, US focused, strong US dollar and global uncertainty—remain areas of concentration. Fixed income holdings remain light with very selective holdings of senior and floating loans making up the majority of the positions as these types of fixed income investments stand to benefit the most from rising US interest rates and the global uncertainty surrounding the negative interest rate policies (NIRP) that several major countries are still undertaking.

2016-performance

We wanted to take a second to address a few phone calls, which are always welcome, received last week regarding 2016 performance. In a nut shell, 2016 investment returns were solely based on three very different periods of time: Pre-Election, Trump Bump and Post Trump Bump. To the right is a numerical representation of each of the three time periods for each of the three major US indexes. In general terms, significant returns could have been made if one had known and invested for a Trump victory, but they would have had to have known the market reaction would have been positive. According to the media surrounding the returns of the Trump rally, there were very few investors positioned for a Trump rally. More likely, many investors and money managers saw the risks of the elections being very high. In looking at the odds of a Trump victory and the high likelihood of a significant decline of more than 8 percent should he have won going into election night, the hybrid models were positioned very defensively, trying to participate very little in any decline that may have come from the elections. The flip side of this is, of course, being willing to give up the upside movement that was a long shot, but could have happened. Playing with A symmetrical risks that are skewed heavily to the downside is a bit like playing with fire; a few times you look good, but the vast majority of the time you end up burned. Investing is far more about risk management than chasing returns. In the end, mitigating or avoiding catastrophic losses of capital turns out far better than chasing the returns of any given index or manager. Returns are great when they are positive and people feel the need to jump on the band wagon, but this is a classic behavioral investment mistake made by many investors. Sticking with an investment methodology of winning by not losing, picking up the low hanging fruit when it presents itself and not being worried about opening a quarterly statement to a negative surprise goes a very long way.

 

Market Statistics:

 

US financial markets seemed to take Trump’s first full week in office in stride, as the Dow finally managed to overcome the 20,000 level:

 

Index Change Volume
NASDAQ 1.90% Average
Dow 1.34% Average
S&P 500 1.03% Average

 

All three of the major US indexes moved higher in tandem on a weekly basis last week on average volume when compared to the volume we have seen over the past year. With the technical breakouts we saw last week, the markets look like they could try to make a run higher from this point, provided there are not any political landmines in the near future.

 

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 5.58%   Energy -0.49%
Semiconductors 4.46%   Utilities -0.71%
Regional Banks 3.37%   Pharmaceuticals -0.78%
Basic Materials 3.11%   Real Estate -1.25%
Broker Dealers 3.08%   Telecommunications -1.46%

 

There seemed to be only two themes in the makeup of the top and bottom five sectors of the markets last week: politics and earnings. On the positive side, earnings helped propel Home Construction to the top of the list, despite what looks like a leveling off of the housing market as interest rates have jumped higher over the past 3 months for borrowers looking for a new place to live. Semiconductors also had a boost from earnings over the course of last week, helping it into the number two spot. Politics played into the remaining three sectors as Regional Banks and Broker Dealers were helped by potential deregulation and Basic Materials was helped by the potentially very large infrastructure spending in the US over the next few years. Politics took several other sectors the other way last week as Pharmaceuticals took a hit due to ongoing concerns of the government regulating drug costs and Telecommunications declined the most following emerging doubts over the Verizon and Yahoo merger. Energy and Utilities both moved lower in a somewhat awkward move as President Trump pushed ahead the Keystone XL and Dakota pipeline projects. This downward move in the sectors could have just been investors selling on the news.

 

With the Fed meeting this week, it was not surprising to see that the US fixed income market moved lower last week:

 

Fixed Income Change
Long (20+ years) -0.26%
Middle (7-10 years) -0.10%
Short (less than 1 year) -0.01%
TIPS 0.23%

Global currency trading volume last week was a little light going into the Lunar New Year. Overall, the US dollar declined 0.15 percent against a basket of international currencies. The best performing of the global currencies last week was the Mexican Peso, which gained 3.5 percent against the US dollar, as the Mexican President took a stand against Trump, repeatedly saying that Mexico will not pay for any US border wall. The worst performance among the global currencies was seen in the Iceland Krona, as it declined by 2.8 percent against the value of the US dollar.

Commodities were mixed last week as most soft commodities moved lower:

Metals Change   Commodities Change
Gold -1.36%   Oil 0.09%
Silver 0.19%   Livestock -1.59%
Copper 3.05%   Grains -2.20%
      Agriculture -1.25%

The overall Goldman Sachs Commodity Index declined 0.51 percent last week. Oil advanced 0.09 percent, during a week that was full of speculation about how much of a potential impact the deregulation of the oil industry in the US could have on the global oil markets. Metals were mixed last week as Gold declined 1.36 percent, while Silver gained 0.19 percent and the more industrially used Copper gained 3.05 percent, retaking much of the decline seen two weeks ago for the metal. Soft commodities were negative last week, with Agriculture overall declining 1.25 percent, while Livestock fell 1.59 percent and Grains posted losses of 2.20 percent.

Top 2 Indexes Country Change   Bottom 2 Indexes Country Change
RTS Index Russia 4.97%   Colombo Stock Exchange Sri Lanka -0.52%
WIG Poland 3.89%   FTSE MIB Italy -0.77%

Last week was a good week for global financial markets as 90 percent of the markets posted gains over the course of the week. The best performing index last week was found in Russia, with the RTS Index turning in a gain of 4.97 percent for the week. Much of this gain is being attributed to the new US administration and their potential relationship with Russia going forward. This was highlighted last week by President Trump’s phone conversation with Russia President Putin over the weekend. Any warming of the currently cold relationship between the US and Russia would stand to benefit Russia greatly and was largely why their market had such a good week last week. The worst performing index last week was found in Italy, and was the FTSE MIB Index, which turned in a loss of 0.77 percent as fears over the solvency of the Italian banks once again surfaced and was great enough to overtake what would have otherwise been a positive week for the Italian markets.

The VIX last week gave an unofficial nod to the new administration as it pushed to the lowest level that we have seen since July of 2014 as fears subsided that there would be heightened volatility in the markets due to the new administration. The current reading of 10.47 implies that a move of 3.02 percent is likely to occur over the next 30 days. The direction of the move over the next 30 days is unknown.

Economic Release Calendar:

 

Last week was an uneventful week for economic news releases as there was only a single economic release that came in different than expected and that was the downside surprise on the Durable Goods orders:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Neutral 1/24/2017 Existing Home Sales December 2016 5.49M 5.55M
Neutral 1/26/2017 New Home Sales December 2016 536K 589K
Slightly Negative 1/27/2017 GDP-Adv. Q4 2016 1.90% 2.20%
Negative 1/27/2017 Durable Orders December 2016 -0.4% 3%
Neutral 1/27/2017 Durable Goods -ex transportation December 2016 0.5% 0.5%
Neutral 1/27/2017 University of Michigan Consumer Sentiment January 2017 98.5 98

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

 

Last week, the economic news releases started on Tuesday with the release of the existing home sales figure for the month of December, which came in very close to market expectations. On Thursday, new home sales, also for the month of December, were shown to be slightly weaker than anticipated, which moved the real estate market a little lower following the release of the data. On Friday, the big releases of the week were released, starting with the advanced estimate of fourth quarter GDP, which printed 1.9 percent growth. This figure was well below the expected 2.2 percent and significantly below the third quarter GDP print of 3.5 percent. While a small slowdown was expected during the fourth quarter, the 1.9 percent was lower than the majority of estimates. The poor print on GDP calls into question the soundness of the growth we have seen in the US economy over the past year and could put a slight dampener on the Fed’s future interest rate movements. Also released on Friday were the latest durable goods orders figures for the month of December. The overall durable goods orders figure was well below market expectations, posting a -0.4 percent reading, while the markets had been anticipating growth of 3.0 percent in orders. The biggest reason for the decline was auto and airplane sales. When transportation was removed from the calculation, overall durable goods sales increased by 0.5 percent, exactly in line with expectations. Wrapping up the week on Friday was the release of the University of Michigan’s Consumer Sentiment Index for the month of January (mid-month reading), which showed very little change in sentiment when compared to the end of December.

 

This week is a busy week for economic news releases, with the primary focus of the releases being on employment here in the US. The releases with the highest potential impact on the markets are highlighted in green below:

 

Date Release Release Range Market Expectation
1/30/2017 Personal Income December 2016 0.40%
1/30/2017 Personal Spending December 2016 0.40%
1/31/2017 S&P Case Shiller Home Price Index November 2016 5.00%
1/31/2017 Chicago PMI January 2017 55
1/31/2017 Consumer Confidence January 2017 112.5
2/1/2017 ADP Employment Change January 2017 165K
2/1/2017 ISM Index January 2017 55
2/1/2017 FOMC Rate Decision February Meeting 0.63%
2/3/2017 Nonfarm Payrolls January 2017 170K
2/3/2017 Nonfarm Private Payrolls January 2017 175K
2/3/2017 Unemployment Rate January 2017 4.70%
2/3/2017 ISM Services January 2017 57

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

 

This week, the economic news releases kick off on Monday with the release of personal income and spending, both for the month of December and both expected to show a small, but positive 0.4 percent increase when compared to December. If we see spending dip into negative territory on these releases it could spell trouble for the markets. On Tuesday, the latest Case-Shiller Home Price Index for the month of November is set to be released with expectations of a solid 5 percent annual gain through November overall for the US housing market. It would take a lot for this release to move the market since the data is pretty stale at the time it is released. Later on Tuesday, the Chicago PMI and the consumer confidence index, both for the month of January, are set to be released and both are expected to be virtually unchanged from the December readings. On Wednesday, the first of the employment related releases of the week are released with the ADP employment change figure for the month of January, which is expected to show jobs increased by 165,000 during the month. If this figure comes to fruition it would represent a solid, but not spectacular, month for jobs being created in January. Late in the day on Wednesday and likely overshadowing all of the other releases for the day is the release of the latest statement from the FOMC, which as discussed above is not expected to hold a rate hike, but rather a change in the language of the statement, becoming more hawkish. Friday is all about employment here in the US as the overall unemployment rate for the month of January, payroll figures and a slew of other employment data are released. Overall, the employment market in the US is expected to have remained little changed when compared to the December readings and it would take significant changes for the markets to move in reaction to the data released on Friday.

 

Interesting Fact Presidential Handedness

 

President James A. Garfield (20th President, 1881) was ambidextrous and could write in Greek with one hand and in Latin with the other at the same time!

 

Source: http://www.ipl.org/div/potus/jagarfield.html

For a PDF version of the below commentary please click here weekly-letter-1-23-2017

Commentary quick take:

 

  • Major developments:
    • Trump is officially the 45th President of the USA
    • Markets lacked a general direction last week
    • 4th quarter earnings pressed ahead

 

  • US:
    • No efforts made last week to reach 20,000 level on the Dow
    • Trump took the Oath of Office on Friday and is now President
    • First executive actions taken Friday were expected
    • Full week of meetings and executive orders likely this week

 

  • Global:
    • UK PM May has a very distorted view of the Brexit outcome
    • ECB left rates unchanged
    • No change in previously outlined monetary policy
    • ECB sees global political factors as major risks in 2017
    • China 2016 growth rate is the slowest in 26 years

 

  • Technical market view:
    • No major changes last week
    • All three indexes moved sideways last week
    • Trading ranges continue to be very tight
    • VIX moved slightly higher for the week

 

  • Hybrid investments strategy update:
    • Purchased a Defensive Equity ETF
    • Purchased an Industrials focused ETF
    • Several equity holdings report earnings this coming week

 

  • This week for the markets:
    • Trump gets to work
    • More uncertainty over Brexit likely
    • Earnings for the fourth quarter of 2016

 

  • Interesting Fact: Moore’s law

 

Major theme of the markets last week: What now?

funny-1-23-17

President Trump is officially in office and now the hard part of being President has begun. For Presidents, the first 100 days are watched very closely to see if the new President can actually fulfill any of his campaign promises. Each President enters office with a full agenda. Most presidents quickly figure out that actually implementing their agenda is next to impossible and spend the next several years fighting for what turns out to be very small pieces of the grand picture they once had. Some of the problem may be that most Presidents hire the same type of people to continue to run the government in the same ways it has always been run, expecting positive changes to happen almost magically. Thus far, President Trump has taken the road less traveled by past Presidents, picking people who are outsiders from politics, who have largely been enormously successful in their financial lives and have no experience working for the government. They come into various government positions with a clear idea of how the private sector would do things and now have the task of trying to reconcile the two very different ways of thinking. We will largely have to wait and see what comes of the attempt and transformational changes in the government. It could turn out worse than it was or become much improved or, most likely, there will be very small changes and victories that the administration will tout, while the bulk of the problems remain. For its part, the global financial markets took Inauguration Day here in the US on Friday in stride and appear to be patiently taking a wait-and-see approach to the transfer of power in Washington DC.
US news impacting the financial markets:

 

US news impacting the markets last week focused on several different items, with the first and most prominent being President Trump. Also having an impact were speeches by Fed officials and the continuation of the fourth quarter 2016 earnings season. The markets seemed to be lazily watching the inauguration on Friday and actually reacted positively to the new President in that they posted gains, for the most part, on Friday. However, with so many ceremonial activities during the day on Friday there was very little actual business taking place in Washington DC. We will have to see how this week goes before the market will start to really assess the current political situation in the US. While many people were waiting for Friday, Fed chair Yellen made two speeches earlier during the week last week that were similar to each other, but the market seemed very attentive to what she was saying in both.

 

Chair Yellen spoke on Wednesday in San Francisco and on Thursday at Stanford. In her first speech, Chair Yellen spoke about the need for a gradual increase in interest rates in the US given the current employment and inflation situation.  She said she would like to see the Fed funds rate increase to “about 3 percent” by the end of 2019. Quickly looking at the current rate of 0.625, the goal of 3 percent over the next 3 years implies 3 rate hikes per year, which would end 2019 at a rate of 2.875 percent. Three rate hikes during 2017 is very close to the number the markets are currently predicting and provide no great new insight into the Fed’s thinking. On Thursday, Chair Yellen tackled the question, “Is the Fed behind the curve and playing catch up with monetary policy?” Her answer was no, the Fed is not behind the curve, but rather playing exactly where it should be given its forward looking projections about unemployment and inflation targets. The markets failed to react in any way to her speech on Thursday, but this was not the markets’ fault as she spoke well after the markets had closed for the day and there were certainly other hot topics on Friday, such as who was wearing what to the inauguration and how Trump’s speech would go.

 

Last week was the second week of earnings season for the fourth quarter of 2016 and the results were skewed negative, in terms of companies beating their expected earnings levels. 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 7% General Electric 0% Netflix 15%
American Express -7% Goldman Sachs 7% Schlumberger 0%
Bank of New York -1% IBM 2% Skyworks Solutions 4%
Charles Schwab 0% J B Hunt Transport -3% U.S. Bancorp 1%
Citigroup 2% Kansas City Southern -4% Union Pacific 4%
CSX 0% Kinder Morgan 6% United Continental 8%
Fastenal 5% Morgan Stanley 25% Unitedhealth Group 2%

 

Netflix provided one of the biggest surprises of the week last week in terms of companies beating earnings expectations as it beat its expected figure by 15 percent. The company saw a sharp uptick in subscribers during both the fourth quarter and full year 2016. 2016 was a test year for Netflix as it was a year that saw the company drop many of its very expensive streaming content contracts in favor of its own original content. The shows Netflix released in 2016 were largely successful; it released hundreds of hours of original content at a cost of $5 billion during the year. It seems unlikely that Netflix will be able to maintain such a fast pace of growth over the coming years without some major expansion into foreign markets. Financials last week largely beat expectations, with the exception of American Express, which saw earnings post lower than expected after slowing revenues hit the top line for the company. According the Factset, Trump is quickly becoming the topic of choice for companies reporting earnings, as nearly 65 percent of the conference calls held so far for the fourth quarter have included comments about President Trump, with the most discussed topic being his tax policy.

 

According to Factset Research, we have seen 61 (12 percent) of the S&P 500 companies release their results for the fourth quarter of 2016. Of the 61 that have released, 61 percent have beaten earnings estimates, while 15 percent have met expectations and 24 percent have fallen short of expectations. When looking at revenue, of the companies that have reported, 47 percent of the companies have beaten estimates, while 53 percent have fallen short. We are still very early on in the earnings season and it would be a futile effort to extrapolate any real information from the extremely small number of companies that have released their earnings reports so far. That said, earnings on the whole for the second week of earnings season were slightly worse than they were during the first week in terms of earnings per share figures, but better in terms of revenues.

 

This is the third full week of trading during which fourth quarter earnings are being released. The number of companies releasing their earnings greatly increases this week as more than 900 companies post results. The table below shows the companies that have the greatest potential to move the markets highlighted in green:

 

3M Freeport-McMoRan Raytheon
Abbott Laboratories General Dynamics RLI
Alphabet Halliburton Sherwin-Williams
Arthur J Gallagher Honeywell International Southwest Airlines
AT&T Intel Stanley Black & Decker
Baker Hughes J & J Snack Foods Starbucks
Boeing Johnson & Johnson Stryker
Bristol-Myers Squibb Kimberly-Clark Swift Transportation
Capital One Financial Las Vegas Sands Texas Instruments
Caterpillar Lockheed Martin Travelers
Chevron McDonald’s United Rentals
Colgate-Palmolive Meredith United Technologies
Dow Chemical Microsoft Verizon Communications
Eastman Chemical Northrop Grumman Western Digital
eBay PayPal Whirlpool
Ford Motor Progressive Yahoo!

 

With such a wide array of companies in so many different sectors releasing earnings this week we should get a slightly better picture at the conclusion of the week as to what sectors likely did well during the quarter and which sectors struggled. Defense contractors will be very closely watched this week as all of the major players release their results and will likely comment on Trump’s agenda. Google (Alphabet on the table above) is always closely watched as it really has defined technology in the recent past and could provide some interesting insight into the future of technology during the earnings conference call.
Global news impacting the markets:

 

The biggest news on the global front last week came out of Europe as there were two speeches by UK PM Theresa May, one in the UK on Tuesday and one at the World Economic forum held in Davos, Switzerland on Thursday. There was also a policy meeting by the ECB and a press conference by ECB President Mario Draghi. As mentioned in last week’s market commentary, UK PM Theresa May gave a very interesting speech on Tuesday, during which she hit on a few of the high points and goals of her plan for the Brexit, which will likely get fully under way later this year. Key points from her speeches on Tuesday and Thursday are as follows:

 

  • UK wants control of immigration to the UK
  • UK wants a customs agreement with the EU, but to not be part of the customs union
  • UK would like a free trade agreement with Europe
  • No part or partial EU membership for any part of the UK
  • UK wants to be a global trading friend to all countries

 

The list continues to much finer points, but the gist of the speeches is that the UK wants to get everything it wants from the EU without giving any control to the EU. Negotiations between the UK and the EU have not even begun, but if PM May really thinks she will get all of the items on her list without giving up a single thing, she seems a bit disconnected from reality. Some of what she mentioned in her speeches did not even make logical sense. For instance, she does not want to be a part of the EU Customs Union, but wants to continue to trade under the agreement so that the UK doesn’t having trading tariffs imposed on it, resulting in the UK continuing to enjoy “frictionless trade.” There is little chance of the rest of the EU going along with this idea. One term that you may start to hear more and more about the Brexit is the idea of a “soft” break and a “hard” break. The two speeches from PM May last week were focused on what would be considered a “soft” break from the Brexit. However, the rest of the EU is not likely to go along with much, if any, of the UK’s wish list, being more likely to push for a “hard” break, forcing the Brexit to be very painful for the UK. The EU needs this Brexit to have some very adverse effects on the UK in order to stop copycat votes in other countries that could be much more damaging to the future of the EU and the Euro, as the UK has always maintained its own currency and a large amount of independence from the rest of the Union. Staying within Europe, last week also held a monetary policy meeting for the ECB.

 

The ECB decided to not increase rates at its January meeting, held last week, diverging from the course set by the US at its December meeting, where it managed to increase rates by 0.25 percent. The ECB left the KEY interest rate at zero, the deposit rate at -0.4 percent and the marginal lending rate at 0.25 percent. ECB President Draghi also made no changes to the planned bond buying program it is still undertaking, leaving the dollar amount of monthly bond purchases at €80 billion through the end of March, at which time it is set to step down to €60 billion per month. During his Press conference, President Draghi said that while growth is occurring in the EU, there is still the need for massive stimulus in order to keep the economy moving forward. He also loosely hinted at global political risks that could negatively impact the EU; those risks are assumed to be the Brexit outcome, the French elections and the new US President.

 

China also made a few headlines last week as it released a lot of economic data points, the most important of which was the official growth rate for 2016 that was seen in China. The growth rate in GDP that was seen in China during 2016, according to the government, was 6.7 percent, which represents the lowest growth rate for the country since 1990 and is lower than the expected 6.9 percent annual rate. 2017 isn’t looking any better for China, as many of the predicted growth rates are indicating even slower growth for the country if there is no trade war with the US and much slower growth if there is a trade war starting in 2017.

 

Technical market review:

 

The trading ranges (yellow lines) in the charts below for both the S&P 500 and the Dow charts remain intact. The NASDAQ managed to stay very close to its longer running trading channel (yellow lines) and was not adjusted to a horizontally moving treading range. The red line on the VIX chart remains the 52-week average level of the VIX, which the index is currently solidly below.

4-charts-combined-1-23-17

There were no changes in terms of technical strength last week on any of the three major indexes. The NASDAQ (lower left pane above) continues to be the strongest of the three indexes as it managed to stay within its upward trend trading channel last week, despite moving largely sideways for most of the week. The S&P 500 (upper left pane above) remains in second place in terms of technical strength as it is solidly trading near the top of its trading range. The Dow (upper right pane above) is currently bringing up the rear in terms of technical strength as it continues to trade near the lower edge of its trading range. The trading ranges on both the S&P 500 and the Dow are relatively narrow, so it would be unlikely that they manage to remain in them for a significant period of time. More likely, we will see a break out either up or down in the near future on both of these indexes. The VIX last week turned in a small gain, but it could have been a larger gain had the VIX not corrected by more than 10 percent during Friday’s trading.

 

Hybrid model performance and update

For the trading week ending on 1/20/2017, returns in the hybrid hypothetical models* (net of a 1% annual management fee) were as follows:

 

  Last Week 2017 YTD Since 6/30/2015
Aggressive Model -0.06% 0.36% 5.67%
Aggressive Benchmark -0.27% 1.79% 1.60%
Growth Model 0.08% 0.46% 4.91%
Growth Benchmark -0.22% 1.39% 1.54%
Moderate Model 0.23% 0.52% 4.11%
Moderate Benchmark -0.15% 0.99% 1.36%
Income Model 0.35% 0.53% 3.94%
Income Benchmark -0.07% 0.52% 0.99%
S&P 500 -0.15% 1.45% 10.09%

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

 

There were two changes to the hybrid models last week as some of the money that was raised through the sales of the three individual equity holds two weeks ago was put to work. The first change was the addition of a new ETF to the models, the Guggenheim Defensive Equity ETF (ticker DEF). The fund is a no transaction fee ETF at our custodian, meaning there are no costs associated with buying and selling the fund. The fund is a broadly diversified ETF of companies that are primarily less risky than the overall markets. The fund has a low correlation to the individual stock baskets that are owned within the hybrid models and also provide a good amount of diversification into underrepresented sectors of the models. The second change last week was the addition of an ETF that focused on industrial companies and is a little higher risk than DEF. The fund is Rydex Equal Weight Industrials, trading under ticker RGI, and provides exposure to industrial companies that are members of the S&P 500. Much like DEF, it is a no transaction fee ETF at our custodian and provides good uncorrelated returns when compared to the hybrid stock allocations. Industrials are likely to be one of the primary beneficiaries of President Trump’s “Make America Great” platform. The equal weight nature of RGI means that the fund does not overweight the largest of the industrial companies, but rather provides equal weighting across both small, mid and large companies. The increased weighting toward small and mid-cap companies compared to a cap weighted index should benefit the focus on American made products as well. Both of the ETFs purchased last week should be viewed as temporary holding positions until the prices of some of the stocks that are currently on our buy list come back down to realistic valuations. When the prices of some of the stocks on our watch list either move lower or our valuations increase to a point where it makes sense to purchase the stocks, should cash need to be raised, both RGI and DEF can be sold.


Market Statistics:

 

With the inauguration occurring on Friday morning here in the US, much of the US financial markets traded in a sideways fashion over much of the week leading up to and on the big day:

 

Index Change Volume
S&P 500 -0.15% Average
Dow -0.29% Average
NASDAQ -0.34% Average

 

All three of the major US indexes moved lower in tandem on a weekly basis last week for the first time in 2017. The Dow failed to make any kind of material run at the 20,000 mark last week. Volume overall was average with many investors seemingly waiting to see how the first 100 days of the Trump Presidency go before they make any major changes to their investments. With January quickly coming to a close, it still looks like the markets have failed to find any real direction so far in 2017. This type of directionless trading could continue for a significant period of time.

 

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
Consumer Goods 1.78%   Healthcare -1.53%
Consumer Staples 1.20%   Financial Services -1.83%
Real Estate 0.85%   Regional Banks -1.93%
Materials 0.68%   Biotechnology -2.35%
Semiconductors 0.57%   Pharmaceuticals -3.16%

 

Defensive sectors of the market took four of the top five performing sectors last week. Consumer Goods and Consumer Staples took first and second, while Real Estate and Materials came in third and fourth. Semiconductors also made the top performing sectors list last week, thanks in large part to upbeat earnings from Skyworks Solutions, which saw increasing demand for semiconductor products through 2017. On the flip side, the five bottom performing sectors of the markets last week were all politically motivated trading. Biotechnology and Pharmaceuticals came under pressure as everything related to increasing healthcare costs seems to be under fire from Washington DC as they attempt to reign in the out of control healthcare spending that we are seeing here in the US. Regional banks as well as financial services moved lower last week as it is unclear what exactly Steve Mnuchin (Trump appointed Treasury Secretary) is likely to do first in regard to the deregulation of the banking industry.

 

The streak of weekly gains for the US fixed income market came to an end last week with the markets unable to notch a fourth straight week of gains. Much of the movement in the fixed income market was due to speeches by several Fed officials, as mentioned above, which seemed to hint at further rate hikes during 2017:

 

Fixed Income Change
Long (20+ years) -1.13%
Middle (7-10 years) -0.54%
Short (less than 1 year) 0.01%
TIPS -0.24%

Global currency trading volume last week was average for the first time in 2017 last week. Overall, the US dollar declined 0.50 percent against a basket of international currencies. The best performing of the global currencies last week was the new Peru Sol, which gained 2 percent against the US dollar. The worst performance among the global currencies was seen in the Canadian Dollar, as it declined by 1.5 percent against the value of the US dollar. Much of the decline in the Canadian dollar was due to the speculation that the OPEC freeze/cut is not going to materialize during 2017, as was originally thought by many oil and commodity traders.

Commodities were mixed last week as we moved further into 2017; oil prices declined:

Metals Change   Commodities Change
Gold 0.74%   Oil -0.18%
Silver 1.57%   Livestock 0.22%
Copper -3.15%   Grains 2.32%
      Agriculture 0.48%

The overall Goldman Sachs Commodity Index declined 0.32 percent last week. Oil declined 0.18 percent, the result of speculation that OPEC will not be able to freeze or cut production and that US production will ramp up under Trump, putting downward pressure on the commodity. Metals were mixed last week as Gold advanced 0.74 percent, while Silver gained 1.57 percent and the more industrially used Copper slumped by 3.15 percent over fears that China slowing down further in 2017 will lower demand for Copper. Soft commodities were positive last week, with Agriculture overall gaining 0.48 percent, while Livestock gained 0.22 percent and Grains posted gains of 2.32 percent.

Top 2 Indexes Country Change   Bottom 2 Indexes Country Change
BIST 100 Turkey 1.89%   CASE 30 Egypt -3.15%
Sao Paulo Bovespa Brazil 1.37%   Caracas General Venezuela -11.57%

Last week was a difficult week for global financial markets as only 28 percent of the markets posted gains over the course of the week. The best performing index last week was found in Turkey, with the BIST 100 Index turning in a gain of 1.89 percent for the week. Much of the gains in Turkey were seen because of a continued slowdown in fighting and attacks within the country as the government continues to try to get a grip on foreign attacks within its country. The worst performing index last week was found in Venezuela, with the Caracas General Index turning in a loss of 11.57 percent as the roller coaster ride that investors in Venezuela have been on continues to provide a lot of excitement.

The VIX last week was setting up for a weekly gain in excess of 10 percent going into Inauguration day, but on Friday it declined by more than 10 percent for very little reason given the size of the move that was seen in the broad indexes. After starting the week at the lowest point the index had seen in the past year, the VIX did manage to post a gain of 3.38 percent over the course of the week. The current reading of 11.61 implies that a move of 3.38 percent is likely to occur over the next 30 days. The direction of the move over the next 30 days is unknown. Now that the new administration has moved into the White House, the VIX appears to be signaling that calm water is ahead for the markets as everyone attempts to figure out what will come of the new presidency.

Economic Release Calendar:

 

Last week was an uneventful week for economic news releases as there was only a single economic release that came in different than expected and that was the upside surprise on the Philly Fed Index:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Neutral 1/17/2017 Empire Manufacturing January 2017 6.5 8.3
Neutral 1/18/2017 CPI December 2016 0.30% 0.30%
Neutral 1/18/2017 Core CPI December 2016 0.20% 0.20%
Neutral 1/19/2017 Housing Starts December 2016 1226K 1193K
Neutral 1/19/2017 Building Permits December 2016 1210K 1217K
Positive 1/19/2017 Philadelphia Fed January 2017 23.6 15.3

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

 

Last week the economic news releases kicked off on Tuesday with the release of the empire manufacturing index for the month of January, which showed slightly slower growth in manufacturing in the greater New York region than expected, but not enough of a slowdown for the market to be concerned. On Wednesday, the Consumer Price Index for the month of December was released with both the overall CPI and core CPI showing very low rates of inflation, providing the Fed with somewhat of a green light on further raising rates at upcoming meetings in 2017. On Thursday, two housing related figures were released, housing starts and building permits, both of which came in close to 1.2 million units during the month of December, which was in line with market expectations. Wrapping up the week on Thursday last week was the release of the Philadelphia Fed Index, which handedly beat market expectations, showing that business conditions and manufacturing in the greater Philly area were much stronger than expected during December. However, with the release coming the day before Inauguration Day, the markets seemed to not take much notice of the positive development.

 

This week is a second relatively slow week in a row for economic news releases, as the primary focus of the markets will once again be on President Trump’s first week in office. The releases with the highest potential impact on the markets are highlighted in green below:

 

Date Release Release Range Market Expectation
1/24/2017 Existing Home Sales December 2016 5.55M
1/26/2017 New Home Sales December 2016 589K
1/27/2017 GDP-Adv. Q4 2016 2.20%
1/27/2017 Durable Orders December 2016 3.00%
1/27/2017 Durable Goods                    -ex transportation December 2016 0.50%
1/27/2017 University of Michigan Consumer Sentiment Index January 2017 98

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

 

This week starts off with two pieces of housing related information as the existing home sales figure for the month of December is released on Tuesday and the new home sales figure for December is released on Thursday. Both of these figures will likely be in line with market expectations, much like building starts and housing permits were last week. The potentially most impactful releases this week occur on Friday and are the GDP estimates for the fourth quarter of 2016, as measured by the government, as well as the durable goods orders for the month of December. The first estimate of Q4 GDP has low expectations currently set, as it is expected to post a reading of only 2.2 after the final revision of Q3 GDP was 3.5 percent. Much of the decline, if it comes to fruition, will likely be blamed on the election. Durable goods orders, on the other hand, are expected to show a drastic turnaround from -4.6 percent in November all of the way up to a positive 3 percent for the month of December. The biggest cause for the turn is expected strong auto sales, as dealers moved out last year’s model year vehicles to make room for 2017 models. Durable goods orders, excluding transportation is expected to have grown at a 0.5 percent rate in December, which matches the growth rate seen in November. Wrapping up the week this week is the University of Michigan’s Consumer Sentiment index for the month of January (mid-month reading). Expectations are for almost no change from the 98.1 that was seen at the end of December, so this release should have a minimal impact on the overall markets. This week is a somewhat odd week in that there are no Fed officials providing speeches this week. Perhaps they are all trying to figure out what it is Trump will successfully do first, leaving them no time for anything else.

 

Interesting Fact —Moore’s law works well in some areas, but not others.

 

Moore’s Law: The number of transistors per square inch on integrated circuits will double every year for the foreseeable future. The extension of Moore’s law is that computers, machines that run on computers, and computing power all become smaller and faster with time, as transistors on integrated circuits become more efficient. Costs of these higher-powered computers eventually came down as well.

 

Moore’s law became the standard of what was possible from a computing power stand point, but it is very interesting to think of Moore’s law if it were to apply to other industries. Personal computers, cellphones, self-driving cars—Gordon Moore predicted the invention of all these technologies half a century ago in a 1965 article for Electronics magazine. However, Intel CEO Brian Krzanich explained that if a 1971 Volkswagen Beetle had advanced at the pace of Moore’s law over the past 34 years, today “you would be able to go with that car 300,000 miles per hour. You would get two million miles per gallon of gas, and all that for the mere cost of four cents.”

 

Source: http://www.investopedia.com, Scientific America

https://www.scientificamerican.com/article/moore-s-law-keeps-going-defying-expectations/

For a PDF version of the below commentary please click her weekly-letter-1-17-2017

Commentary quick take:

 

  • Major developments:
    • 4th quarter earnings season has officially kicked off
    • Markets awaiting the incoming administration
    • Brexit looks like it could get messy

 

  • US:
    • No efforts made last week to reach 20,000 level on the Dow
    • Trump is about to take office
    • Earnings season for the 4th quarter of 2016 commenced

 

  • Global:
    • Brexit debate heated up
    • World Bank lowered economic forecasts
    • China economic data was mixed

 

  • Technical market view:
    • Two of the major indexes moving sideways
    • NASDAQ continues to push higher
    • VIX is at the lowest point in the past year

 

  • Hybrid investments strategy update:
    • Sold Hormel
    • Sold Flower Foods
    • Sold AmerisourceBergen
    • Looking to purchase two new ETFs when the time is correct
    • Positioned for the incoming administration

 

  • This week for the markets:
    • Trump coming into office
    • Trade talks between the US and other governments
    • Earnings for the fourth quarter of 2016

 

  • Interesting Fact: Hail to the Chief

 

Major theme of the markets last week: Trump

trump-fired

With the inauguration of the 45th President occurring at the end of this week, the focus of the global markets last week was largely on President-elect Trump. Confirmation hearings got fully underway for many of the top cabinet positions to which Trump has named someone, with some of the hearings going well and others seeming to have a more difficult time. It was interesting to see that not all of the cabinet nominees towed the standard Trump political lines, with some breaking from his opinion to offer their own. Financial markets took a bit of a breather last week, not really moving much one way or the other, as the world awaits the incoming administration in the US. Toward the end of the week last week we got the first round of corporate earnings for the fourth quarter of 2016, but even this new information was not largely reported on or reacted to in the financial markets as everyone seemed fully consumed with the upcoming transition of power.

 

US news impacting the financial markets:

 

With inauguration at the end of this week, the US news seemed to talk about little else than President Trump and the cabinet nomination hearings that were under way every day of the week last week on Capitol Hill. The time has finally come that Americans will hopefully get a glimpse at what the new administration has to offer over the next four years. The markets took the looming peaceful transition of power pretty timidly when compared to what they did following the Trump victory on Election Night. While sideways movement on both the S&P 500 and the Dow for the week felt like a big letdown following the unruly, weekly positive returns of the markets during the Trump rally, it was probably a good week of consolidation for the markets. Markets do need to take breaks in rallies from time to time and seeing that they took a breather without collapsing is a positive development (some pundits had predicted they would collapse downward). With earnings season also getting fully under way last week, investors finally have some tangible evidence as to the current state of the US economy and not just expectations for what is to come from the Trump administration, potentially leading to cool heads prevailing when analyzing investment opportunities.

 

Last week was the first week of earnings season for the fourth quarter of 2016 and the results were skewed positive, in terms of companies beating their expected earnings levels. 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:

 

Bank of America 5% Delta Air Lines 0% WD-40 -6%
BlackRock 2% JPMorgan Chase 20% Wells Fargo 3%

 

Last week the focus of earnings announcements seemed to be on financials and a few of the large companies in the S&P 500. Financials showed a lot of strength during the fourth quarter thanks to the unexpected election of Trump here in the US and the changing stance of the US Federal Reserve regarding the future for interest rates. With the market rally that followed Trump’s election, the large financial institutions made a lot of money as investors adjusted their fixed income positions; bond trading commissions are very lucrative in banking. This increased volume of bond trading only picked up during the Trump rally as investors got fully ready for the December rate hike and started to position for the prospects of three more rate hikes from the Fed during 2017. It was very good to be a fixed income trader at one of the large financial institutions during the fourth quarter of 2016. One interesting earnings release last week was that of WD-40, which missed earnings expectations by 6 percent. This miss, interestingly enough, is a positive sign for the overall health of the US economy as people are opting to replace rather than fix products with WD-40’s line of repair and maintenance products, which is typically done going into times of positive economic certainty. This positive outlook seen by the drop in sales of WD-40 products was also seen in the various consumer sentiment measurements throughout the end of 2016.

 

According to Factset Research, we have seen 30 (6 percent) of the S&P 500 companies release their results for the fourth quarter of 2016. Of the 30 that have released, 70 percent have beaten earnings estimates, while 7 percent have met expectations and 23 percent have fallen short of expectations. When looking at revenue, of the companies that have reported, 33 percent of the companies have beaten estimates, while 67 percent have fallen short. With this being so early on during the earnings season, giving much weight to the above figures is a useless task. What can be said is that the fourth quarter earnings season is the worst start to earnings season that we have seen in the past three quarters. We will have to wait and see how the fourth quarter plays out over the coming weeks before any kind of final judgement can be made about the fourth quarter earnings season overall.

 

This week is still part of a rolling start to the fourth quarter earnings as there are only 178 companies reporting earnings for the week. The table below shows the companies that have the greatest potential to move the markets highlighted in green:

 

Alaska Air General Electric Netflix
American Express Goldman Sachs Schlumberger
Bank of New York IBM Skyworks Solutions
Charles Schwab J B Hunt Transport U.S. Bancorp
Citigroup Kansas City Southern Union Pacific
CSX Kinder Morgan United Continental
Fastenal Morgan Stanley Unitedhealth Group

 

Several of the companies that are reporting earnings this week are bellwether companies, in that they are leaders in their respective industries and sectors of the markets. IBM is closely watched as the first of the major technology companies to report and could set the overall trend for technology for the quarter. Netflix is a darling stock for many hedge funds and individual investors that delivered stellar growth in first three quarters of 2016, but was the company able to maintain its growth rates for the fourth quarter as it continued expanding globally? General Electric is a very widely held company and is impacted by many different industries as it is a large industrial company. American Express will be watched to see how its business has been hurt by losing the Costco contract and how the spending patterns of small businesses changed during the fourth quarter. UnitedHealth is one of the nation’s largest healthcare providers and very much a part of any changes that are actually made to the Affordable Care Act, so its comments on any pending changes could prove pivotal to the healthcare sector as a whole. In addition to the actual results numbers that will be coming out over the next few weeks, perhaps more important will be any comments from management about what they see in the future for their businesses under the new administration.

 

Global news impacting the markets:

hard-brexit

Global news last week seemed to largely focus on the upcoming transition of power here in the US, but there were a few key items that made headlines that the global markets took note of last week. The upcoming fight over Brexit in the UK, the World Bank downgrading expectations for future global growth and the mixed economic data out of China were the main focal points of the week. Prime Minister Theresa May has a very difficult job ahead of her as she must try to satisfy both the group of people who adamantly want to leave the EU and the group that adamantly wants to stay. It doesn’t help that both sides are just about equal in size and power. Last week the British Pound hit a fresh 31 year low against the value of the US dollar ahead of a big Brexit speech that PM Theresa May gave earlier this morning. In her speech she had some very interesting lines such as, “We do not seek membership of the single market; instead we seek the greatest possible access to it.” She also suggested that any damage done to trade by the EU would cut both ways as the EU exports £290 billion of goods to the country during any given year. In her speech she provided very little details about the steps that will be taken, even going as far as saying, “Those who urge us to reveal more, the blow-by-blow details … will not be acting in the national interest” and “Every stray word and hyped-up media report will make it harder to get the right deal for Britain.” For its part, the EU response was as expected when it pretty much said that the situation is unlikely to go well for Britain and that negotiations will only begin once Article 50 has been triggered. PM May is walking a very fine line; it seems very unlikely that she will end up getting her way with the EU, as the EU has much more at stake to lose if it caves into any of the UK’s demands as other countries will likely jump on the bandwagon in a “me too” fashion. The Brexit situation was one of the contributing factors to the World Bank lowering its growth expectations globally for 2017 and into the future.

 

Last week the World Bank released its semiannual report on global growth. In the report, the World Bank cut projections for 2017 from 2.8 percent down to 2.7 percent, which is a relatively small adjustment. However, the organization called out the uncertainty surrounding the incoming US President and the uncertainty around the Brexit as two items that could potentially derail the global economy from even hitting the newly lowered target growth rate. Developed countries’ growth rate for 2017 is predicted to only be 1.8 percent, placing the bulk of global growth on the shoulders of the emerging markets. One country that will feel more pressure than many others to grow in 2017 is China, which last week released a mixed set of economic data points. Prices at the producer level in China were shown to have increased at 5.5 percent in December, which signals that inflation could be right around the corner for the country. There are also prospects of a trade war with the US as the new administration in the US seems to have no problems picking a fight with China when it comes to trade. This could potentially come on the heels of trade already slowing down for China as its trade surplus during the month of December shrunk by almost $4 billion. China has been very verbose about its distain for some of what the new administration has said; only time will tell if this talk turns into action.

 

 

Technical market review:

 

As you can see below, the charts of the S&P 500 and the Dow have been adjusted this week and have had their upwards trending trading channels replaced with horizontal trading ranges (yellow lines). The NASDAQ managed to stay very close to its longer running trading channel (yellow lines) and was subsequently not adjusted to a horizontal moving treading range. The red line on the VIX chart remains the 52-week average level of the VIX, which the index is currently solidly below.

4-charts-combined-1-17-17

In terms of technical strength, the NASDAQ (lower left pane above) looks to be playing a bit of catch up as the index looks to be about a month and a half behind the other two more broad indexes. NASDAQ is clearly the strongest of the three indexes at this point, but it is also the index that could potentially come under the most pressure from the incoming administration. Both the S&P 500 (upper left pane above) and the Dow (upper right pane above) have now been moving in a sideways fashion for the past month and a half as some of the unknown luster of the Trump rally appears to be wearing off. For its part, the VIX (lower right pane above) seems to think that sideways movement is the way for the markets to go over the coming 30 days as the fear gauge made a new low point over the last year on Friday last week.

 


Hybrid model performance and update

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

 

  Last Week 2017 YTD Since 6/30/2015
Aggressive Model -0.90% 0.42% 5.73%
Aggressive Benchmark 0.39% 2.07% 1.88%
Growth Model -0.71% 0.38% 4.82%
Growth Benchmark 0.31% 1.61% 1.76%
Moderate Model -0.52% 0.30% 3.88%
Moderate Benchmark 0.22% 1.15% 1.52%
Income Model -0.44% 0.18% 3.57%
Income Benchmark 0.11% 0.58% 1.05%
S&P 500 -0.10% 1.60% 10.25%

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

 

There were a few changes to the hybrid models over the course of the previous week with the most notable changes coming on the individual equity side of the models. Last week, it was finally time to say goodbye to three stocks that have been in the hybrid model since the beginning. Hormel, Flower Foods and AmerisourceBergen were all sold last week and all sold with gains of more than 100 percent for investors who have been with the Hybrid strategy since the beginning. Hormel was sold as it looks like management will potentially come under more political pressure as many of its products are exported around the world and have the potential to be caught in the cross fire of trade wars. Also, its raw materials costs are likely to increase in 2017, something the company has not had to deal with in any meaningful way over the past few years. Flower Foods was sold last week because the amount of volatility seen in the stock over the past 12 months was driving too much of the overall volatility in the more aggressive hybrid models. The stock is probably still a good investment, just not at the amount of daily risk that is associated with owning the stock. Some of you may wonder why Flower Foods was not sold earlier and you may not realize that Flower was the best performing stock in the equity allocations since election night, gaining more than 30 percent. AmerisourceBergen was sold last week as this stock looks like it will get caught in the political mess that is likely to occur with the upcoming healthcare law changes. With the President-elect taking repeated shots at the Pharmaceuticals industry with regards to its drug prices, it is only a short jump to taking aim at the delivery companies of those high priced drugs. It seems that margins for the group as a whole will feel political pressure with everyone pointing figures at everyone else related to the drug industry. With three long-term stock positions sold last week, we will be looking at putting the money to work this week with the most likely prospects being two ETFs: one that focuses on Industrials and the other on Defensive equity positions. Both funds have a low correlation to the existing positions and provide both upside opportunity with reasonable risk and the ability to move back out of the positions with no trading costs should a downdraft in the markets start to materialize. More information will come on the two funds, if and when they are purchased in the hybrid models.

 


Market Statistics:

 

The first full trading week of 2017 is now behind us and the markets appear to be adjusting to the realization that Trump is taking office at the end of the week:

 

Index Change Volume
NASDAQ 0.96% Average
S&P 500 -0.10% Average
Dow -0.39% Average

 

Volume last week picked up to just about average on all three of the major US indexes as investors finished putting their final positioning in place for the incoming administration. Not surprisingly, the NASDAQ led the way higher last week as the other two indexes gave up a little ground. While this looks like a classic “risk on trade,” it is probably little more than some investors selling their recent winners and moving the proceeds to areas of the markets that have lagged the most in the Trump rally.

 

The following were the top 5 and bottom 5 performers over the course of the previous week:

 

Top 5 Sectors Change   Bottom 5 Sectors Change
Medical Devices 3.05%   Pharmaceuticals -1.02%
Materials 3.04%   Natural Resources -1.58%
Semiconductors 2.77%   Energy -2.05%
Healthcare Providers 2.39%   Oil & Gas Exploration -2.12%
Software 1.60%   Residential Real Estate -2.86%

 

Sector performance last week was primarily driven by one-off headlines that pertained to very specific sectors of the markets. Starting on the negative side this week, Real Estate took the bottom honors over fears of a slowdown in the US housing markets due to three or possibly four interest rate hikes occurring during 2017. Energy as well as Oil and Gas exploration and Natural Resources all moved lower after enjoying a large Trump bump, thanks to the price of oil declining by more than 2 percent for the first time in nine weeks. Pharmaceuticals took a hit last week after President Elect Trump said that he thought the cost of drugs in the US was too high and the government should do something about it. On the positive side of life, Medical Devices and Healthcare Providers got a boost as they look to benefit from the repeal of the Affordable Care Act that is currently being worked on in Congress. Semiconductors and Software both moved higher, thanks to the strong performance of the NASDAQ during the week. Materials was the beneficiary of a nice tail wind last week, thanks to the rising costs of metals, which turned in strong performances across the board.

 

Last week made the third week in a row of gains in the US fixed income markets as investors continued to adjust their positioning in fixed income in light of Fed expectations and the lofty valuations of the US equity markets:

 

Fixed Income Change
Long (20+ years) 0.37%
Middle (7-10 years) 0.29%
Short (less than 1 year) 0.02%
TIPS 0.47%

Global currency trading was back to non-holiday trading volume last week for the first time in 2017. Overall, the US dollar gained 0.19 percent against a basket of international currencies, fully offsetting the decline that was seen two weeks ago. The best performing of the global currencies last week was the Australian Dollar, which gained 2.77 percent against the US dollar as the prices of metals last week increased significantly. The worst performance among the global currencies was seen in the Egyptian Pound, as it declined by 3.96 percent against the value of the US dollar. Much of the decline in the Egyptian Pound was due to the ongoing reverberations of the currency being allowed to freely float against the US dollar.

Commodities were mixed last week as we moved further into 2017 as oil prices declined:

Metals Change   Commodities Change
Gold 2.20%   Oil -2.31%
Silver 1.92%   Livestock 2.78%
Copper 6.68%   Grains 2.31%
      Agriculture 1.92%

The overall Goldman Sachs Commodity Index advanced 0.19 percent last week, thanks to all of the commodities, aside from oil, offsetting the losses that were incurred in the price of oil. Oil declined 2.31 percent, marking the first time in nine weeks that we have seen oil prices fall by more than two percent, thanks to the support of oil prices coming from the freeze/cut OPEC deal that was announced two months ago. The decline last week in the price of oil was due to increased speculation that OPEC will not follow through with the production freeze or cut. All of the metals pushed higher as Gold advanced 2.20 percent, while Silver gained 1.92 percent and the more industrially used Copper pushed higher by 6.68 percent. Soft commodities were positive last week, with Agriculture overall gaining 1.92 percent, while Livestock gained 2.78 percent and Grains posted gains of 2.31 percent.

Top 2 Indexes Country Change   Bottom 2 Indexes Country Change  
BIST 100 Turkey 5.73%   PSI 20 Portugal -1.86%
Merval Argentina 3.29%   Caracas General Venezuela -2.59%

Last week was a mixed week for global financial markets as 62 percent of the markets posted gains over the course of the week. The best performing index last week was found in Turkey, with the BIST 100 Index turning in a gain of 5.73 percent for the week. Much of the gains in Turkey were seen because of a slowdown in fighting and attacks within the country as the government continues to try to get a grip on foreign attacks within its country. The worst performing index last week was found in Venezuela, with the Caracas General Index turning in a loss of 2.59 percent as investors and citizens alike continue to wonder and speculate about the future of the current government regime running the country.

The VIX last week had a very calm week, trading in a very narrow trading range and ultimately settling the week out 2.85 percent lower than it started. The VIX ended the week last week at the lowest point that we have seen on the VIX over the past year, in a sign that very little volatility lies ahead for the markets if the VIX reading is to be believed. The current reading of 11.23 implies that a move of 3.24 percent is likely to occur over the next 30 days. The direction of the move over the next 30 days is unknown. The VIX feels low to most traders who see more uncertainty than is currently being priced in, but we have to remember that the VIX can adjust very quickly, with gains or losses in excess of 30 percent in a single day not being uncommon.

Economic Release Calendar:

 

Last week was an uneventful week for economic news releases as there were no releases that significantly beat or missed market expectations:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Neutral 1/13/2017 PPI December 2016 0.3% 0.3%
Neutral 1/13/2017 Core PPI December 2016 0.2% 0.1%
Neutral 1/13/2017 Retail Sales December 2016 0.6% 0.7%
Neutral 1/13/2017 Retail Sales ex-auto December 2016 0.2% 0.6%
Neutral 1/13/2017 University of Michigan Consumer Sentiment Index January 2017 98.1 98.5

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

 

All of the releases last week were released on Friday and started with the Producer Price Index (PPI) gaining a very small 0.3 percent overall and only 0.2 percent when looking at the core PPI reading. Both figures indicate that inflation here in the US economy is not currently a problem and it doesn’t look like it will be a problem in the near term, giving the Fed a likely green light to raise rates at least three times in 2017. Retail sales for the month of December showed the expected increases, but they were a little bit of a let down to the markets, which had been hopeful that they would be much stronger thanks to holiday sales. Overall, holiday sales did increase by about 4 percent this year, but the traditional brick and mortar stores seemed to lag the less traditional shopping methods such as Amazon and other online retailers. Wrapping up the week last week was the release of the University of Michigan’s Consumer Sentiment index for the month of January (first estimate), which showed that sentiment changed little from the mid December reading.

 

This week, the focus of the financial markets will be on Donald Trump’s inauguration and little else here in the US. The releases with the highest potential impact on the markets are highlighted in green below:

 

Date Release Release Range Market Expectation
1/17/2017 Empire Manufacturing January 2017 8.3
1/18/2017 CPI December 2016 0.30%
1/18/2017 Core CPI December 2016 0.20%
1/19/2017 Housing Starts December 2016 1193K
1/19/2017 Building Permits December 2016 1217K
1/19/2017 Philadelphia Fed January 2017 15.3

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

 

Manufacturing will be a focus of this week’s economic news releases as the Empire Manufacturing index kicks things off on Tuesday with slightly lower expectations than we saw in December. The Consumer Price Index (CPI) is set to be released on Wednesday with expectations that much like the PPI released last week, inflation will at best be shown to be benign. Housing starts and building permits are a long shot for any market impact as this time of year is a slow time in much of the US for building homes. Wrapping up the week on Thursday is the release of the Philadelphia Fed index for the month of January, which will likely move in the same direction as the Empire Index released earlier during the week. This week is a very busy week for Federal Reserve officials as there are 11 speeches being made during the week, with Chair Yellen giving two of them. The markets will likely listen in closely to what they have to say, but if last week’s speeches by Fed officials are any indication, very little new information will be provided until the FOMC sees just how the new administration is going to follow through on some of its campaign promises.

 

Interesting Fact —Hail to the Chief has some very interesting beginnings.

 

On Thursday, Hail to the Chief will be heard once for outgoing President Obama and once for incoming President Trump, but the history of the song is very interesting. According to NPR, the song is from Celtic descent and was originally played for a ruthless Scottish Chief named Roderick Dhu, who was a sworn enemy of England during the medieval times. For more information and to listen to the tune, please visit NPR here: http://www.npr.org/2017/01/05/508319054/hail-to-the-chief-the-official-anthem-of-the-u-s-president

 

Source: www.npr.org

For a PDF version of the below commentary please click here weekly-letter-1-9-2017

 

January 9th, 2017

 

Commentary quick take:

 

  • Major developments:
    • Volume returned to normal last week
    • Markets pushed higher to open the new year

 

  • US:
    • Dow made a valiant effort at 20,000, but fell slightly short
    • Earnings season kicks off this week
    • Alcoa will not be kicking things off
    • Energy earnings expectations are lofty
    • US labor market shown to be flattening

 

  • Global:
    • Speculation about 2017 and the potential Brexit
    • Speculation about the populist movement in Europe
    • China becoming more outspoken about Trump

 

  • Technical market view:
    • All three major US indexes broke down
    • Support level being tested on the NASDAQ
    • VIX moved off of the 52-week low point last week

 

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

 

  • This week for the markets:
    • Earnings season starts
    • Preparations for inauguration day are underway
    • Focus will continue to be on the new administration

 

  • Interesting Fact: Could the US penny finally be on the chopping block?

 

Major theme of the markets last week: Start of 2017

funny-1-9-17

Last week saw the start of trading for 2017. As the above cartoon alludes to, nothing has changed during the first few trading days when compared to how the markets ended 2016. There is still a lot of excitement about the Dow making a run at the 20,000 level (we were very close late last week) and there remains a lot of hope that the incoming administration will be able to produce growth in the US economy that has been lacking since the conclusion of the Great Recession in 2009. We are now less than two weeks away from inauguration day. Shortly after we should start to see just how well this Congress and the new President may work together on the many lofty goals set out on the campaign trail.
US news impacting the financial markets:

 

The first trading week of any new year is typically a time that investors look at their investments and make minor changes to their portfolio allocations. This is done either through rebalancing to a target model, based on some factor such as age or risk level, or picking what they think could perform well for the New Year ahead. This time of year has also historically been a time that some investors put money into the market, either from positions they sold near the end of the previous year or from previous year-end bonuses that are typically paid in the first part of the following year. Whatever the reason, the start of a new year brings about hope for strong returns and 2017 seems to be no different than years past. One of the biggest US news and financial market related items last week had to do with the earnings season, which is now upon us.

 

Corporate earnings season for any quarter can significantly impact stocks. Fourth quarter earnings seasons are particularly impactful because investors receive both a short- and long-term picture of a company’s performance; the short-term perspective emerges in the quarterly assessment and the long-term perspective emerges in the full-year assessment. One sector that many investors are interested in is Energy. The interest lies in the results for the fourth quarter 2016, full year 2016 and outlook for 2017.  You may remember that 2016 was not an easy year for Energy companies, and oil producers in particular, as you can see in the chart below of the S&P 500 earnings from Factset Research. Overall S&P 500 earnings are the blue columns, while the Energy sector is represented by the yellow columns:

sp-500-earnigns-q4-1-9-17

As you can see in the above chart, Energy started to be a major drag on the overall S&P 500 earnings during the fourth quarter of 2014 and became progressively worse through the third quarter of 2016. Energy saw consistent negative earnings growth, meaning it was losing more money on a quarterly basis than the sector did the prior quarter. The results of the fourth quarter of 2016 appear below the green arrow in the above chart; you will notice that the yellow column has all but disappeared, posting a very slight negative reading. With the drag from Energy fully lifted, S&P 500 earnings are now expected to post a second quarter in a row of growth since Q1 2015. Remember that the third quarter of 2016 was expected to post a negative 3 percent earnings growth rate, but the turnaround in Energy was so profound that S&P 500 earnings managed to turn all of the way around to a positive 3.1 percent. With improvements in Energy expected to be even better for fourth quarter earnings than they were for the third, it looks like the current estimates for the fourth quarter may be a little lower than they should be as the current estimate is for only 3 percent earnings growth. Over the next several weeks we will see how earnings unfold as there are several well-known companies (table below) that are kicking things off this week by releasing their earnings for the fourth quarter of 2016. The companies with the highest potential to move the markets with their releases are highlighted in green:

 

Bank of America Delta Air Lines WD-40
BlackRock JPMorgan Chase Wells Fargo

 

As is typical, banks are generally the first of the major companies to release their earnings in any given quarter. This quarter, expectations are high for the sector as management will likely outline what they see in 2017 for the sector as a whole under the new administration and in a potentially faster than anticipated rising rate environment. WD-40 is an interesting company to watch, specific to its earnings release and ensuing market reaction, as the company is a counter-cyclical company. Many of its products are used to repair products that are designed to wear out. If consumers are very bullish about their economic future, they are less likely to repair items and more likely to just toss them away and buy new. This is a mindset that is not positive for WD-40 and hence why Wall Street follows this particular company closer than it otherwise would. One oddity in the above table that some readers may pick up on is the fact that Alcoa is not listed in the table this week, despite the company unofficially “kicking off” earnings season pretty much every quarter. Alcoa announced two weeks ago that it was moving its earnings reporting from Monday, the 9th of January to Tuesday, the 24th and provided no reasoning as to why it made the change. If this change in timing becomes permanent in the future, it looks like some other company will have to step in and fill the void as consistently being the first company to “kick off earnings season.” Aside from earnings chatter last week, there was very little in the financial media that had a substantive impact on the overall markets. One thing that was mentioned late in the week and closely watched was the Dow trying for a fourth day to make it to the 20,000 level and falling less than one point short, hitting an intraday high of 19,999.63 on Friday. There really isn’t anything from a technical or markets perspective about the 20,000 level other than it is a nice round number and provides for a psychological level that is easy for everyone to remember. We will just have to wait and see if it can make it this week or not.

 

 

 

Global news impacting the markets:

 

With the New Year’s celebrations around the world extended into the usual trading week last week, many of the global markets had a shortened trading week. There was, however, some news that came out that impacted the financial markets. Brexit became a hot topic during the middle of last week as UK Prime Minister Theresa May made it clear in a New Year 2017 speech that the Brexit would be moving forward, that Britain will leave the single market (EU) and that the “UK will not hold on to bits of EU membership.” Her use of “Britain” caused a bit of an uproar in Scotland and Wales as both countries are still thinking they will be able to break away from the UK and remain in the EU if the Brexit goes through. The impact of the dueling opinions about the Brexit was acutely seen in the currency markets as the Euro hit a fresh 14-year low against the US dollar and the British pound fell to its lowest level since 1985. Developments surrounding the Brexit in 2017 comprise one of the potentially largest geopolitical risks to the overall markets going forward. China was not to be outdone last week by talk of the Brexit as the Chinese government stepped up its rhetoric about incoming US President Trump.

 

China last week warned that if the US drops its long-term “One-China” policy, it could have long reaching ramifications. The One-China policy is a long standing policy that treats mainland China and Taiwan as one in the same. Over time, Taiwan has broken away more and more in the eyes of foreign governments, but China still believes that Taiwan technically belongs to China. The tension stems from a phone call between President-elect Trump and the President of Taiwan Tsai Ing-wen, the first such call between Taiwan and the US in many years. The relationship between China and the US became even more tense on Sunday after the President of Taiwan made a layover stop in Houston and met with a delegation of high ranking Republicans from Washington DC as she was waiting to continue on her way to Central America. It has also been well publicized that she will be making a layover stop in San Francisco on January 13th on her way back to Taiwan from Central America. Following news of the layover in Houston, the Chinese government released the following comment in the Communist’s Party’s official newspaper, “Sticking to (the One-China) principle is not a capricious request by China upon U.S. presidents, but an obligation of U.S. presidents to maintain China-U.S. relations and respect the existing order of the Asia-Pacific.” President-elect Trump has not yet responded to the thinly veiled threat on Twitter or by any other manner of communication. Global markets care about the situation between the US and China because it could adversely impact global trade if a trade war were to erupt. Tensions continue to increase over China’s land grab in the South China Sea as well, where China is literally building its own islands and claiming all of the water around the newly formed islands. President elect Trump and members of his new administration know they need to tread very lightly on the situation with China because China is a major trading partner with the US and our allies and owns a large percentage of the outstanding US government debts, debts China could dump on the open market, which the US government would be unable to stop. This type of action could have global impacts that could jeopardize future global growth.

 

Technical market review:

 

Despite the move higher of more than one percent last week, only one of the three major US indexes managed to make it back into its trading channel: the NASDAQ. Each trading channel on the charts below was drawn based on the rough movements of the markets seen since election night. The red line on the VIX chart remains the 52-week average level of the VIX, which the index is currently solidly below.

4-charts-combined-1-9-17

With the NASDAQ (lower left pane above) managing to climb back into its recent trading channel, it takes the top spot in terms of technical strength, while the S&P 500 (upper left pane above) comes in second and the Dow (upper right pane above) brings up the rear. This is a stark difference compared to the leadership we saw during the rally following the Trump victory. In the rally following the election, the Dow was the winner by a long shot and the NASDAQ severely lagged behind. In technical investing there is the principal of “reversion to the mean,” which means the indexes typically move with one outpacing the others, then the others play catch up as the front running index either slows down or moves lower. The movements from the previous week could be the start of such a move by the major indexes, but we will have to wait and see if it continues to play out that way. The VIX opened 2017 very close to the lowest level that we have seen on the fear gauge in the past year. If the VIX is correct, there will be very little volatility in the overall markets over the coming 30 days, which means it is predicting a very smooth transition of power in Washington DC and no sweeping changes being implemented by either Congress or the new administration that would materially impact the stock market.

 

Hybrid model performance and update

For the shortened trading week ending on 1/6/2017, returns in the hybrid hypothetical models* (net of a 1% annual management fee) were as follows:

 

  Last Week 2017 YTD Since 6/30/2015
Aggressive Model 1.34% 1.34% 6.71%
Aggressive Benchmark 1.67% 1.67% 1.48%
Growth Model 1.10% 1.10% 5.58%
Growth Benchmark 1.30% 1.30% 1.44%
Moderate Model 0.82% 0.82% 4.42%
Moderate Benchmark 0.92% 0.92% 1.29%
Income Model 0.63% 0.63% 4.04%
Income Benchmark 0.47% 0.47% 0.94%
S&P 500 1.70% 1.70% 10.37%

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

 

There were no changes made to the hybrid models last week as 2017 kicked off. The models are well positioned for the Trump administration, if they follow through with some of the campaign promises. Now that we are into tax year 2017 and the prospects of lower tax rates on individuals still seems highly likely under the new administration, we will be booking some of the long term gains on individual stock positions that have been driving too much of the overall hybrid models’ volatility over the past few months. Currently, the list contains 5 companies that are on the block to be sold in the near terms when the markets provide a good selling point. With current market valuations being so lofty and the uncertainty surrounding short-term geopolitical risks, the proceeds from these stock sales will be invested into a few different ETFs that will serve as temporary parking spots until prices and valuations on new stock investments come more in our favor.

 

Market Statistics:

 

Last week, 2017 started off with a rally as volume picked back up to about average:

 

Index Change Volume
NASDAQ 2.56% Average
S&P 500 1.70% Average
Dow 1.02% Average

 

Average volume last week on the three main indexes means that it was actually about 20 percent  better than average because the volume was produced with one less trading day than a typical week. As mentioned above, we could be seeing the start of a reversion to the mean trade where the NASDAQ is the top performing index for a while as it plays catch up to both the S&P 500 and the Dow. Overall, this was not a bad way to start 2017.

 

The following were the top 5 and bottom 5 performers over the course of the previous week:

 

Top 5 Sectors Change   Bottom 5 Sectors Change
Biotechnology 5.61%   Insurance 0.74%
Software 3.75%   Transportation 0.56%
Pharmaceuticals 3.56%   Utilities 0.54%
Telecommunications 3.51%   Regional Banks 0.44%
Broker Dealers 3.38%   Semiconductors -0.08%

 

The sector performance last week was a little confusing as some of the largest movement was due to merger and acquisition deals announced during the week. After being two sectors of political distain for the last half of last year, Biotechnology and Pharmaceuticals took two of the top three performing spots to start 2017. It was a little concerning to see Transportation make it among the worst performing sectors last week, but since the return was positive and just not as large as other sectors, it was a little less concerning. Typically, transportation is a good leading indicator for the overall markets; when it is under performing or negatively performing, it a sign that trouble could be on the horizon.

 

Last week made the second week in a row of gains in the US fixed income markets as investors cheered in the new year of trading:

 

Fixed Income Change
Long (20+ years) 1.45%
Middle (7-10 years) 0.26%
Short (less than 1 year) 0.04%
TIPS 0.25%

Global currency trading volume was below average last week, with the New Year’s holiday closings observed on many of the global currency markets. Overall, the US dollar declined 0.19 percent against a basket of international currencies. The best performing of the global currencies last week was the Russian Ruble, which gained 2.82 percent against the US dollar as there is further speculation about how Russia influenced the US election. The worst performance among the global currencies was seen in the Turkish Lira, as it declined by 3.31 percent against the value of the US dollar. Much of the decline in the Lira was due to uncertainty about the country following increased violence in Turkey over the course of the past week.

Commodities were mixed to start 2017 as metals all moved higher, while oil and livestock pushed lower:

Metals Change   Commodities Change
Gold 1.95%   Oil -0.34%
Silver 3.51%   Livestock -1.88%
Copper 1.39%   Grains 1.67%
      Agriculture 1.85%

The overall Goldman Sachs Commodity Index declined 0.57 percent last week, with much of the decline being attributed to the fall in the price of oil. Oil declined 0.34 percent in a week of slow trading as everyone still awaits the latest round of production reports from OPEC members to see if they are actually freezing or cutting oil production. All of the metals pushed higher as Gold advanced 1.95 percent; while Silver was the big winner of the week, gaining 3.51 percent; and the more industrially used Copper pushed higher by 1.39 percent. Soft commodities were mixed last week, with Agriculture overall gaining 1.85 percent, while Livestock fell 1.88 percent and Grains posted gains of 1.67 percent.

Top 2 Indexes Country Change   Bottom 2 Indexes Country Change  
Merval Argentina 8.08%   Colombo Stock Exchange Sri Lanka -1.21%
PSEi Philippines 5.96%   BIST 100 Turkey -1.32%

Last week was a good week for global financial markets as 95 percent of the markets posted gains to start the year of the rooster. The best performing index last week was found in Argentina, with the Merval Index turning in a gain of 8.08 percent for the week. The worst performing index last week was found in Turkey, with the BIST 100 Index turning in a loss of 1.32 percent as violence from extremists seems to be spreading within the country, thanks to large military advances being made in Syria, forcing some fighters across the border into Turkey.

After being up more than 22 percent two weeks ago, it was only fitting that the VIX fall back down to earth, giving up more than 19 percent last week and essentially ending at the same point it started two weeks ago. The current reading of 11.32 implies that a move of 3.27 percent is likely to occur over the next 30 days. The direction of the move over the next 30 days is unknown. The VIX feels low to most traders who see more uncertainty than is currently being priced in, but we have to remember that the VIX can adjust very quickly with gains or losses in excess of 30 percent in a single day not being uncommon.

Economic Release Calendar:

 

Last week was the first trading week after the end of a month (December in this case), meaning that it was employment week with the majority of the meaningful releases of the week being related to the US labor market. There were no releases that significantly beat or missed market expectations last week:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Slightly Positive 1/3/2017 ISM Index December 2016 54.7 53.6
Neutral 1/4/2017 FOMC Minutes December 2016 NA NA
Neutral 1/5/2017 ADP Employment Change December 2016 153K 170K
Neutral 1/5/2017 ISM Services December 2016 57.2 56.6
Slightly Negative 1/6/2017 Nonfarm Payrolls December 2016 156K 175K
Slightly Negative 1/6/2017 Nonfarm Private Payrolls December 2016 144K 170K
Neutral 1/6/2017 Unemployment Rate December 2016 4.70% 4.70%

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

 

Last week the economic news releases started on Tuesday with the release of the overall ISM index for the month of December, which came in slightly higher than anticipated. On Wednesday, the Federal Reserve released the minutes from its December meeting, a meeting at which the Fed increased rates by 0.25 percent. The meeting minutes that were released held nothing new of substance and were largely ignored by the markets. On Thursday, the ADP employment change figure for the month of December posted a gain of only 153,000 jobs, a little short of the expected 170,000 jobs, but not short enough to cause alarm about the government figures that were released the following day. The services side of the ISM was also released on Thursday and came in slightly higher than the markets had anticipated, much like the overall ISM index released earlier during the week. On Friday the US government released its latest trove of employment information with overall unemployment for the month of December holding steady at 4.7 percent, while both nonfarm public and private payroll figures disappointed market expectations. The labor force participation rate stayed almost flat at 62.7 percent, while wages were shown to have ticked up to an annualized growth rate of 0.4 percent during December. Overall, the employment and labor force numbers that were released last week painted a picture of a steady labor market here in the US to start 2017.

 

This second week of 2017 is a bit of a slow week for economic news releases as there are only five releases. The releases with the highest potential impact on the markets are highlighted in green below:

 

Date Release Release Range Market Expectation
1/13/2017 PPI December 2016 0.30%
1/13/2017 Core PPI December 2016 0.10%
1/13/2017 Retail Sales December 2016 0.70%
1/13/2017 Retail Sales ex-auto December 2016 0.60%
1/13/2017 University of Michigan Consumer Sentiment Index January 2017 98.5

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

 

All of the economic news releases this week occur on Friday and are kicked off with the release of the Producer Price Index (PPI) for the month of December. Overall prices are expected to show very little inflation despite oil prices moving higher by more than 8 percent during the month. Core PPI is expected to print an even lower number as prices just seem stuck in the US economy. Retail sales for the month of December are released later during the day on Friday and could potentially impact the overall markets. Already, the data from retailers who have spoken out about December sales does not look very strong, even though initial holiday sales figures had looked very good. Wrapping up the week this week is the release of the University of Michigan’s Consumer Sentiment index for the month of January (end of December reading), which is expected to be little changed from the mid December reading of 98.2. Additionally, this week there will be many Fed officials speaking, with Chair Yellen herself giving a speech on Thursday. The financial markets will likely watch these speeches more closely than the other economic news releases because everyone is trying to figure out just how many times the Fed is expecting to raise rates in 2017 and to gain insight into any of their thoughts about the new administration. Thus far, all Fed officials have done a pretty good job of staying away from answering political questions.

 

Interesting Fact —Penny could be on the chopping block

 

The cost to produce the 1-cent coin rose to 1.5 cents in the 2016 fiscal year, Mint spokesman Tom Jurkowsky said. That’s the first time costs have been up since 2011, but still just the latest in a string of losses for the most abundant, but least valuable coin in circulation.

 

The White House budget released in March 2014 called for a “comprehensive review” of U.S. currency production, including alternatives for the money-losing penny and nickel. Treasury Secretary Jacob Lew just over a year ago said his department was conducting such a review to see if it still made sense to keep the penny.

 

Only the a government needs to generate reviews and reports to figure out just how long they can keep making products they lose money on for each and every one made.

 

Source: www.Forbes.com

For a PDF version of the below commentary please click here full-year-2016-in-review

2016 Wrap Up: “Populism” and “Antiestablishmentarianism” are two of the best words that can describe the underlying tones of 2016 that had noticeable impacts on the global financial markets. Populism is defined by dictionary.com as “antiestablishment or anti-intellectual political movements or philosophies that offer unorthodox solutions or policies and appeal to the common person rather than according with traditional party or partisan ideologies.” The best example of populism at work during 2016 was in the UK when the Brexit vote occurred and the global financial markets fell by a significant amount. Antiestablishmentarianism is defined by dictionary.com as “a policy or attitude that views a nation’s power structure as corrupt, repressive, exploitive, etc.” This was the primary platform that President-Elect Trump rode through the primary election cycle, ultimately beating the epitome of the establishment—Hillary Clinton. Both of these events, Brexit and the US Presidential election, drove the vast majority of the market movements that were seen around the world in 2016.

Roller coaster

The year 2016 was a bit of a wild ride for the financial markets as we started the year with the Dow seeing the worst 5 trading days to start any year going back to 1886 and 6 days in the first half of January having greater than 400 point swings on an intraday basis. What ultimately transpired early during 2016 was a 10 percent correction in the US financial markets and even larger losses in many of the main global markets, thanks to the falling price of oil. Energy companies around the world were starting to panic as the price of oil briefly touched $26 per barrel, a 13 year low. Then in early February, OPEC announced a plan to freeze production near an all-time high level, which was enough to turn around the 18-month slide that had been occurring in the price of oil; the black gold ultimately moved up to $50 per barrel by the beginning of June.  As the price of oil turned upward, so too did overall corporate earnings that were dragged down by the energy sector’s dismal results in the low price oil environment that started the year. With very favorable year-over-year comparable quarters, earnings on the S&P 500 went from a 12 month decline of 5.7 percent at the end of first quarter 2016, to a positive 4.3 percent increase for third quarter of 2016, which is a very fast recovery in earnings by historical standards. All of this movement in the markets was done during a year that was fraught with speculation about several other major themes that moved the markets—the US Federal Reserve and Politics.

 

We started 2016 with the expectations that Fed Chair Yellen would be able to raise rates a few times during 2016. In the end, the Fed was only able to eke out a single rate hike in 2016 of 0.25 percent at the year-end December meeting. Primary reasons given by Chair

Yellen throughout 2016 for not raising rates was that inflation was running too far below the target rate of 2 percent and that foreign markets and events had materially changed the Fed’s thinking about raising rates. All of this was said despite the labor market here in the US improving much of the year and the overall unemployment rate in the US falling below the Fed targeted rate. As we moved through 2016, it became clear that the Fed did want to raise rates, but political events derailed what would likely have been rate hikes at two key points along the way.

Brexit flag star leaving

The Brexit vote in the UK on June 23rd rocked the global financial markets and brought in a significant amount of immediate uncertainty that we had not seen in the global markets since the Great Recession. The Brexit vote was a referendum vote that asked the people of the UK if the UK should stay in the EU or leave. Leading up the vote and even early on Election Day, it was commonly thought that the “stay” vote would prevail as there were just too many potentially disastrous outcomes should the UK leave the EU. However, the voice of the Populist movement in the UK was louder than everyone else and the vote ultimately came in with the “leave” group winning. The movement in the aftermath of the vote was extreme in certain areas of the global markets and much less so in others. European banks took the outcome badly, falling by more than 20 percent the following day in most cases. The British Pound plunged against the Yen and the US dollar and fears of an economic collapse in the UK mounted. The government was left in a bit of a lurch as Prime Minster David Cameron resigned, as he promised he would do if the “leave” vote won. Financial markets around the world quickly realized that it would take a significant amount of time to work out the mechanics of a leave vote in the UK and how best to move forward and that it was not the end of the world that some pundits had made it out to be. For the most part, global financial markets recovered the majority of the Brexit vote losses in less than two weeks following the large decline. However, as we saw later during the year, the populist vote in the UK emboldened other movements around the world, including the Trump campaign in the US and the referendum vote in Italy.

 

US politics played an integral part in the movements of the financial markets both here in the US and abroad during 2016 as there seemed to be an endless amount of campaigning being done by a very wide field of candidates. The Democratic Party nominated its obvious front runner, Hillary Clinton, with a little less enthusiasm than it would have liked, thanks to the dogged campaign of Bernie Sanders and the seemingly unstoppable leak of information about her campaign and other dealings. The Republican side of the ticket was more a circus act than anything else as the wide field of candidates slowly thinned to the eventual winner, Donald Trump. While the primary process made for some great late night comedy routines, they paled in comparison to the comedy routines that were created during the head-to-head run up to Election Day. In a very interesting twist, the campaign boiled down to antiestablishment versus the establishment. Trump, for his part, played the game very well, focusing on the downtrodden areas and people in the US who had not benefitted from the past 8 years of Democrats running the White House. Ultimately, it was these disgruntled people who came out to vote that pushed Trump over the 270 needed electoral votes to ultimately win the race. From an investment point of view, there were virtually no investment managers or pundits on TV that realistically gave Donald Trump a true shot at winning; leaving the markets very uncertain about what to do with Trump’s victory. This is no more clearly seen anywhere than on election night as commentators called out election results and watched the Dow futures plunge to losses of more than 820 points when it became clear that Trump was going to win. Then, with Trump’s victory speech sounding like he was going to soften some of his hard-line stances from the campaign trail, the markets turned all of the way around and ended the day after the election with a more than 200 point gain for the Dow, representing a more than 1,000 point turn around in less than 24 hours. The speed of the turnaround was truly remarkable as investors scrambled to adjust their positions from an expected Hillary Clinton win to an actual Trump victory. Sectors of the markets that would benefit from large increases in government spending on infrastructure jumped higher. As more and more potential cabinet candidates came to light and were officially announced (sometimes through twitter) after the election, very specific areas of the markets that should do well in an era of deregulation, such as energy and financials, popped higher. Hope of a political outsider being able to come in and “fix” a broken government system have pushed the US markets higher with the Dow receiving the greatest benefit, gaining nearly 12 percent in the month following election day. On all three of the major US indexes, nearly all of this year’s gains have occurred post US election.

 

2017 Outlook: 2017 will be about President Trump and whether or not he can accomplish many of his campaign ideas when he gets to Washington DC and finds out that he actually does need congressional support for many of his big ideas. Republicans control both houses of Congress and the White House, but unlike in times past, it does not mean that everything will run smoothly in terms of legislation. There are many Republicans who dislike President Trump and will not go out of their way to support some of his legislation, potentially even siding with Democrats on some issues. The biggest items of 2017 that could have an immediate impact on the US and global financial markets will be a potential tax cut for corporate America going from the current 35 percent down to a 15 percent rate and consolidating and lowering personal incomes taxes. The Corporate tax rate decrease would be a big boost for business in America, but it would be a one-time short lived boost. The key will be to make sure that it has a lasting impact. Individual tax reform is a much larger deal for the economy as the US consumer contributes a lot to the overall wealth and spending in the economy. Low tax bills for everyone would provide a boost to the economy and it could be fairly long lasting. However, lower income taxes would likely be inflationary, which could force the Fed to take action of raising rates faster than they otherwise would like to do. Raising rates has adverse impacts on the housing market as well as financial lending, which could ultimately put the Fed in a very precarious position, needing to take action while at the same time knowing that the action it is taking could very well lead to a mild recession.

 

Keep in mind that many of President-Elect Trump’s ideas involve spending a lot of money or cutting income from the government (lower taxes). At some point, all of this will need to be paid for or else the national debt will balloon very quickly. China may also have a potentially big impact on the debt situation in the US as it is one of the largest foreign owners of US debt and anything the US does to extend our credit even further will likely put China in a more powerful position. It will be a very interesting balancing act to watch with Trump’s inevitable missteps along the way.

 

From an investment specific standpoint, 2017 looks like it will be a good year for industries that have been heavily regulated in the past, but under the new administration have strong hopes of diminished regulations— financials, banking and energy. Less likely to perform well in 2017 are areas of the market that have either been heavily against Trump all along, like most of the major technologies companies and industries that rely heavily on government subsidies, such as alternative energy. The US dollar looks like it could continue to either maintain its current level or increase in value against foreign currencies, for the simple reason of the US having problems that are not as potentially damaging to our currency. Countries still peg their currencies to the US dollar because they know free floating their own currencies would make business within their countries virtually impossible. The barrel of oil is still denominated in US dollars and, despite the quasi dysfunctional times we have recently seen with the US government, the US government is still the best government in the world for business and prosperity. None of those fundamentals that make the US dollar attractive are likely to change in 2017 or any time in the next few years.

 

It is now time for the fun part of this review and outlook—the prediction for how 2017 should turn out for the US financial markets if history repeats itself. The following analysis is based strictly on the historical movements of the three major indexes, given certain situations playing out in 2017. I provide a table of the assumptions and variables being examined and then the average corresponding returns for each of the indexes based on those assumptions and variables being true:

 

Assumption Variable Dow S&P 500 NASDAQ
10 Year Yield Increasing 10 Year Rate Change 7.22% 8.42% 11.30%
1st Year President Election Cycle 6.73% 8.35% 10.22%
GDP between 2% and 3% GDP 5.23% 3.27% -11.52%
Years that end with 7 Years ending in 7 2.75% 9.03% 8.38%
Year after Strong Returns Market Change 5.62% 8.72% 10.27%
Unemployment between 4.0% and 5% Unemployment Rate 7.37% 1.78% 11.05%
Inflation between 1% and 2% Inflation Rate 9.13% 10.08% 14.02%
Long run average Long Run Average 8.22% 8.39% 12.09%
Total Average 6.54% 7.26% 8.23%

 

I start my analysis with fixed income, looking at the directional move in the US 10-year bond yield.  My assumption is that bond yields will be moving higher over 2017 due to the current market thinking of three rate hikes during 2017. The second item I looked at was 2017 being the 1st year for a new President. The third point I looked at was GDP and years during which GDP grew by between 2 and 3 percent. The latest projections from the US Federal Reserve as well as other institutions such as the World Bank and the IMF largely fall within this range. I want to point out that the NASDAQ data is a little skewed for this GDP assumption as there have only been two times when this series of variables have occurred. The fourth scenario I looked at was a very simple scenario where I pulled all of the previous years that ended in “7” (I have some reservations about using this data set in my analysis since it only has a handful of data points, but it is interesting). The fifth set of data I looked at was what happens the year following a move greater than or equal to the move we saw in 2016 on each of the indexes. The sixth indicator I looked at was the overall rate of unemployment in the US, which I estimated would be between 4 and 5 percent at year-end for 2017. The seventh indicator I looked at was the inflation rate here in the US and what happens during years that we see inflation between one and two percent. The final data set that I looked at was all of the historical years for each of the indexes and what the average return has been. All of the data was analyzed using the full time series of data on the three major indexes for the Dow. The data went back to 1930 for the Dow, to 1958 for the S&P 500 and to 1972 for the NASDAQ.

 

I’m expecting a below average year from the numbers above in the scenario analysis. There appears to be many things that could be positive for the US in 2017, but there are still a number of global uncertainties that could impact the global financial markets. China is a big unknown over how it will handle the new US administration. Russia is a wild card, to say the least. North Korea is getting closer to a nuclear capable missile (from the latest information from a defector in the UK). Protectionism threatens a global trade war among super powers that could lead to everyone being worse off.  All of these could have adverse impacts on the markets, but in the end, financial markets around the world are very adept at climbing the proverbial wall of worry. Being able to adjust and manage investments in a manner that is capable of assessing opportunities and threats and then taking action on the analysis provides the best opportunity to take advantage of the ever changing investment world in which we find ourselves living.

 

 

Have a great 2017!

 

Peter Johnson

 
Full Year 2016 in numbers:

 

The following is a numerical representation of 2016. I will start with the three major US indexes and the VIX, which turned in performance as follows:

 

Index 2016
Dow 13.42%
S&P 500 9.54%
NASDAQ 7.50%
VIX -22.90%

 

The returns in the above table are a little misleading as it looks like a good year from a returns standpoint and yet is was a very difficult year for the markets. With a more than 10 percent correction out of the gate in January and very spiky upward movement on oil and the results of the election, the year did not feel like a good year for the markets. In fact, without the impact of the Trump victory in early November, we very easily could have seen the markets end the year in negative territory.

 

Globally, the top three performing indexes for 2016 were:

 

Country Index 2016
Venezuela Caracas General 117.3%
Egypt CASE 30 76.2%
Russia RTS Index 52.2%

 

 

 

Politics played a very big part in the top three performing indexes in 2016. In Venezuela, out of control inflation within the country is forcing anyone who has access to money to put it into the country’s stock market, which is essentially made up of a handful of companies, hoping that they will at least be able to keep up with inflation and maintain their value through the eventual regime change. Egypt’s stock market rocketed higher during the last three weeks of 2016 because the country allowed its currency to free float, which in turn brought a huge inflow of foreign investors who drove the beaten down stock much higher, very quickly. Russia is the oddity of the group as it suffered under the low price of oil throughout the year, especially during the start of the year, but now seems to be gaining some power and is seeing its stock market increase. This one could have legs if the incoming US administration tries to greatly improve the relationship the US has with Russia through the lowering of sanctions or other actions that could benefit the country.

 

Globally, the bottom three performing indexes for 2016 were:

 

Country Index 2016
Denmark OMX Copenhagen -11.9%
Portugal PSI 20 -11.9%
China Shanghai Composite -12.3%

 

China turned in the worst performance globally in 2016 as the economy in China slowed down to a growth rate that in all likelihood is well below its stated 6.5 percent growth. While it is not a hard landing for any economy in a classical point of view, when an economy goes from double digit growth to mid-single digit growth, it feels like a hard landing and the stock market in China reflects this. Portugal having the second worst performing stock index was not entirely surprising as the country has struggled for the last several years under the terms of the bailouts that occurred three years ago when the PIIGS all looked to be in financial trouble. Denmark turned in poor performance for 2016, mainly due to the large concentration of the main stock index in pharmaceuticals and healthcare companies. Novo Nordisk, the global pharmaceuticals company, made up a large part of the decline on its own, falling almost 40 percent for the year. When that single company is more than 25 percent of your total index in terms of value, it is hard to overcome such a decline.

 

For those of you who follow and are interested in the style box performance of various investments throughout the year, below is the standard style box performance for 2016:

 

Style /  Market Cap Value Blend Growth
Large Cap 17.26% 12.03% 7.01%
Mid Cap 19.79% 13.69% 7.22%
Small Cap 31.98% 21.60% 11.68%

Value was the clear winner in 2016, when looking at the style boxes, performing better than both blend and growth when looking at each of the different market cap areas. Small caps were better than mid and large caps and mid caps were better than large caps. Going into the election here in the US, this table was almost perfectly flipped, with small caps being the worst performing and growth beating value. It is truly amazing how fast things can turn around in the financial markets.

 

The following table gives the performances for the top-performing sectors for 2016:

 

Sector Change
Semiconductors 44.12%
Regional Banks 32.32%
Natural Resources 30.09%
Energy 27.88%
Oil & Gas Exploration 24.98%

 

 

Semiconductors continued to enjoy their time in the spotlight as the Internet of things (IoT) continued to evolve in 2016, calling for more and more semiconductors; demand only seems to be going one way for the industry as a whole. Regional banks made it into second place thanks to the Trump rally; prior to that, they were middle of the pack. The final three sectors that rounded out the top 5 for 2016 were all oil related as natural resources benefited from rising oil prices, as did energy in general and oil and gas exploration. These were longer term trends in 2016 that were mainly based on OPEC and its decision to freeze production and its promise to cut production in 2017.

 

The bottom-performing sectors for 2016 were as follows:

 

Sector Change
Consumer Staples 1.24%
Healthcare Providers 1.01%
Healthcare -2.69%
Pharmaceuticals -11.74%
Biotechnology -21.41%

 

Biotechnology and Pharmaceuticals came under a lot of pressure during 2016 as the political environment made it easy to go after big corporations that didn’t seem to care about the people their medicines helped. This was highlighted during the year by one former hedge fund manager who used to run a pharmaceuticals company that decided to raise the price of his company’s drug by 1,500 percent on little more than a whim. The election didn’t help the industry as both sides took aim at drug pricing and vowed to hold the companies accountable. The spillover from Pharma and Biotech was seen in Healthcare and Healthcare Providers as well, as these two sectors struggle with drug pricing as well as the unknowns of the Affordable Care Act and the spiraling out of control costs of medical insurance. Consumer staples took the fifth spot form the bottom for 2016 as many of the consumer staples companies were hit in the rising rate environment combined with uncertainty over the speed at which the Fed will be raising rates in 2017.

 

Commodities continued to see very volatile trading throughout 2016. Returns were as follows:

 

Commodities Change
GS Commodity Index 10.12%
Gold 8.03%
Silver 14.56%
Copper 16.76%
Oil 6.55%

 

Overall, commodities turned in a good year, thanks to a late-in-the-year rally. Metals all moved higher, but much of their movement was experienced in the first half of the year and faded toward the close of 2016. Oil ended up with a gain of only 6.5 percent for the year, which may seem small, but is a gain of almost 50 percent compared to where oil was trading in early February.

 

With 2016 starting out the year looking like the Fed would increase rates and the Fed delivering the single rate hike in December, the US fixed income market changed very little over the course of the year:

 

Fixed Income Change
Long (20+ years) 1.18%
Middle (7-10 years) 1.01%
Short (less than 1 year) 0.41%
TIPS 4.68%
Long US Dollar 3.16%

 

 

Much like other asset classes, the benign movement seen in the overall yearly fixed income movement figures doesn’t tell the full story of 2016. Long bonds, for example, were up nearly 20 percent from the start of the year through the end of June, only to fall by almost 20 percent during the last half of the year, with losses accelerating as the Fed moved on rates in December. Other similar movements were seen to a lesser extent on shorter maturity fixed income throughout the year. TIPS rallied at the end of the year as the inflation protection aspect of the bonds brought a lot of value in light of the proposed spending plans of the new administration. Overall, the US dollar gained a little more than 3 percent during 2016 against a basket of international currencies. As mentioned above, however, this trend does not look like it will be slowing