For a PDF version of the below commentary please click here  weekly-letter-12-5-2016

Commentary quick take:

 

  • Major developments:
    • Markets were mixed last week
    • Italians voted NO in the referendum
    • OPEC has a deal?

 

  • US:
    • Dow continued to rally, while NASDAQ stumbled
    • US economy is growing and unemployment is falling
    • December Fed meeting is on the horizon; could we see a rate hike?

 

  • Italy:
    • Italian referendum saw a “No” vote
    • Five Star building political strength
    • Italian banks are once again under pressure
    • PM Renzi has resigned
    • Euro is once again being called into question

 

  • OPEC:
    • Deal has been reached
    • Will the cuts actually occur?
    • Will the cuts impact the price of oil?

 

  • Technical market view:
    • Dow continued to rally, while other indexes faltered
    • VIX increased marginally
    • NASDAQ and S&P 500 have moved back into their trading ranges

 

  • Hybrid investments strategy update:
    • Purchased positions in US dollar
    • Purchased Midcap Value
    • Purchased Senior Loans
    • Purchased Financials
    • Sold Preferred Securities fund
    • Continued to make progress on shifting the models for the new administration

 

  • This week for the markets:
    • Questions about Italy
    • Speculation about the December FOMC meeting

 

  • Interesting Fact: OPEC by definition is a cartel…

 

Major theme of the markets last week: Constitutional reform vote in Italy—Defeated

colosseum-12-5-16

One of the key themes that prevailed throughout last week was the vote in Italy that took place on Sunday. The outcome was officially announced early Monday morning. Prime Minister Renzi lost the vote and resigned, leaving Italy in a bit of a political limbo. With Italy being one of the largest economies in the Eurozone, this turn of events now creates the next hurdle in a series of hurdles that the region will have to deal with in 2017. While markets around the world seem to have taken the outcome of the Italian vote in stride, there are now more uncertainties than ever for Europe and the future of the Euro as the common currency. The markets in Europe immediately declined following the results of the vote in Italy, but the decline was very short lived. Unlike the 3 days it took to recover from the losses surrounding Brexit, the markets in Europe largely recovered from the results of this vote in less than 5 minutes. Meanwhile, President Elect Trump seems to be grateful that the global spotlight has, for the time being, moved to someone else’s problems.
US news impacting the financial markets:

 

Last week, the US news seemed to focus on Cabinet positions in the Trump administration and the upcoming December meeting of the Federal Reserve, which has actually seen the odds of a rate hike at the meeting decrease from the 100 percent seen three weeks ago. Cabinet positions are being filled and with each announcement we get a little more information about what the eventual Trump administration will likely look like and how it may or may not function. Last week, the announcement of Secretary of Defense James Mattis provided a bump to the Defense and Aerospace sector, while the announcement of Treasury Secretary Steven Mnuchin provided a little boost to the financial sector. Investors also seem to be waiting on the announcement of the Secretary of State, despite this position likely having little direct impact on any specific investments. With the political game currently being played in Washington DC, the US financial markets took aim at something that can been seen as more directly impactful to the financial markets: the upcoming Fed meeting.fed-watch-12-5-16

 

On December 13th and 14th, the FOMC will hold its final meeting of 2016, a meeting that will be crucial if it is to get any rate hikes in during 2016. As you can see from the table to the right, the odds of a rate hike at the December meeting have actually declined over the last week from 96 percent down to 93 percent. When looking at Fed numbers, this is an almost certainty, especially when you consider the great GDP figures and strong employment situation seemingly unfolding here in the US, according to data released last week. If the FOMC goes through with the rate increase in December, which looks highly likely, the press conference following the announcement will become very important because Chair Yellen should use the time to outline the committee’s thinking going forward in 2017 and potentially even hint at the number of increases she thinks will be likely during 2017. By deduction from various Fed members’ comments at the end of 2015, the number of hikes anticipated in 2016 was 4 and the committee will likely only manage one, so whatever is said at the press conference about 2017 will have to be taken with a large grain of salt. Currently, the bond market has been moving like there are a number of increases coming over the next 18 months. The 10-year US Treasury touched a yield of more than 2.4 percent last week, for the first time since June of 2015. One thing is for certain, in all of the uncertainty surrounding the Fed: the data that Chair Yellen has pointed to in the past as indicators she likes to watch has improved to levels that would be consistent with the Fed raising interest rates.

 

Global news impacting the markets:

 

The primary event last week in the global news that impacted the financial markets was the referendum that took place in Italy on Sunday. The referendum addressed a proposed change to Italy’s constitution that would have made the Prime Minister much stronger at the expense of the strength of Parliament. The vote turned down the proposal with at least 60 percent of the voters voting against the proposed changes and Prime Minister Matteo Renzi, who staked his political career on the passage of the referendum. Currently, the biggest risks in Italy are in the banks, which are holding many bad assets that could present a very interesting problem if they are allowed to fester much longer. Currently, Banca Monte dei Paschi (the world’s oldest bank) is trying to raise about 5 billion euro to deal with all of the company’s bad loans, but the fundraising has not come cheap as it has to offer higher and higher rates to fill its funding goals. UniCredit is the other major financial institution in Italy that is in trouble with bad loans and it is trying to raise 13 billion Euros to plug its problems. If either bank fails to raise enough cash, the problems for Italy multiply quickly as bond holders of some of the banks’ debts would likely have to take losses, which could have spillover effects on Italy’s economy as a whole. These negative effects on the economy in Italy are coming at a particularly inopportune time as Italy has seen its GDP shrink each of the past 2 years. Italy is the only developed country in the world to see this happening. All of this makes global investors wary of Italy for the time being, but the voting results call into question a much bigger issue that is impacting not just Italy, but Europe, the US and likely the Asian economies in the near future.

 

The populist movements that started in the UK with the Brexit vote swept into the US with the Trump election and has now moved back across the pond and taken the Italian vote in a movement that has some investors concerned, both here in the US and in Europe. Europe is hanging on by a very thin margin to the old political system, which remains in power largely because Germany remains so strong. With the announcement of the Italian vote and the announcement that France’s President Holland will not be seeking reelection, however, the framework for a massive move toward populism in Europe could be on the horizon. Can the current framework of a common currency, free trade and open borders survive a populist Europe? Probably not in the current form. This was seen partially in a very interesting sentence released by the Five Star government party in Italy on Monday, when it said it does not agree with the Eurozone, but does agree with the principals of the European Union. The problem is that without the common currency, the European Union is unlikely to survive as each country would control its own currency and use tactics to try to get an upper hand on trade with its neighbors, which would go directly at the heart of the EU.

 

The other major global news last week that impacted the financial markets was the announcement of an OPEC deal that cuts production for the first time since 2008.

opec-cartoon-12-5-16

Many global investors are skeptical at best of the new deal reached as the numbers announced allow for some countries to continue to increase oil production, while other countries such as Russia (who is not bound to OPEC in any way) have “said” that they will lower production. In total, if the deal is honored by all parties—and that is a huge “IF”—total global output would be cut by a little less than one percent. Other issues with the current deal include that it will only be in place for the first six months of 2017, has no penalties for cheating and ignores nearly all oil producing countries in the world outside of OPEC and Russia, countries such as the US, which would like nothing more than to cause pain to the oil producers in the Middle East through low oil prices. On the announcement of the deal, oil prices around the world shot up by more than 10 percent. One interesting aspect of the deal that seemed to be largely overlooked by the markets was the fact that OPEC said it would like to see oil prices in the $55 to $60 per barrel price range. OPEC typically does not comment on specific price targets for the price of oil. This could have been one of the primary driving forces behind the market movement seen in oil last week.

 

Technical market review:

 

Last week, we saw a very fast breakdown on the NASDAQ, a more mild breakdown on the S&P 500 and slow, muddling high movement on the Dow. In the charts below, the blue lines represent the closest level of resistance for each of the indexes, established by points the markets have touched in the past prior to bouncing higher. The red lines represent the upper edge of the most recent trading range on each of the three major indexes. For the VIX, the red line remains the rolling 52-week average level of the VIX.

4-charts-combined-12-5-16

The Dow (upper right pane above) is clearly the strongest of the three major indexes as it continued to push higher last week, albeit at a much slower rate than we have seen it moving since the Trump rally began. The S&P 500 (upper left pane above) and the NASDAQ (lower left pane above) seem to have finally broken down from the enthusiasm over Trump as they both broke their up-trends last week. With little in the way of meaningful news coming out ahead of the Fed’s December meeting, it seems we could see a bit of a convergence in the indexes over the coming weeks. The Dow will likely push lower and the NASDAQ will likely move higher, meeting somewhere in between in terms of movement from current levels. As mentioned last week, it is highly unusual to see such out-performance of the Dow versus the other two major US indexes. The tables are normally flipped, with the Dow being the laggard, while the NASDAQ races ahead, but that does not appear to be the case thus far in the post-Trump rally that we have seen.

 

Hybrid model performance and update

For the trading week ending on 12/2/2016, returns in the hybrid hypothetical models* (net of a 1% annual management fee) were as follows:

 

  Last Week 2016 YTD Since 6/30/2015
Aggressive Model -0.97% -0.26% 4.02%
Aggressive Benchmark -0.58% 3.00% -2.24%
Growth Model -0.91% -0.06% 3.27%
Growth Benchmark -0.46% 2.51% -1.47%
Moderate Model -0.82% 0.08% 2.80%
Moderate Benchmark -0.32% 1.95% -0.81%
Income Model -0.91% -0.03% 2.58%
Income Benchmark -0.16% 1.17% -0.13%
S&P 500 -0.97% 7.24% 6.24%

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

 

The shift from what had been working for the past several years leading up to September to setting up for some of the more likely outcomes of the Trump administration continues in all of the Hybrid models. With interest rates likely increasing, some of the safe haven assets that have been long-time core positions in the models, positions such as Nuveen Preferred Securities Fund (NPSAX), are being exchanged for shorter maturity holdings that will likely experience less negative impact in a rising rate environment. Last week, there were a number of changes in the Hybrid models. The first was the addition of a Senior Loan fund, which was purchased with some of the proceeds from the sale of NPSAX. The fund holds senior fixed income positions in corporate debt, meaning it is safer than lower tranches of corporate debt, while still paying a nice dividend and exhibiting really low volatility during the recent upward movement in raises that is likely to continue under the Trump administration.

 

A second change last week was the addition of a Mid-Cap Pure Value fund, which plays a different angle to Trump’s agenda, the “Make America Great Again” mantra. Large cap companies here in the US are mostly global in nature, meaning they do business all over the world. If the US does pull in a little from the global economy, the companies that would benefit the most would be companies that are based and doing most of their business here in the US. Many Mid Cap Value companies fall into this categorization. Building on the “Make America Great Again” theme, another purchase last week was the addition of a rising US dollar fund, as this seems like the most likely outcome of the uncertainty in Europe, coupled with the uncertainty with trade deals in Asia and rising or stable commodities prices, which we have been seeing.

 

The final change last week in the Hybrid models was to purchase an initial position in financials as this is one sector of the markets that will likely benefit for a long time under the Trump administration. The financial sector has seen a vast amount of increased regulations following the financial crisis of 2008; much of it warranted, but some of it way over done and actually becoming a burden on business for financial institutions. With Trump’s latest picks in key financial positions, it looks highly likely that some of the burdensome financial industry regulations will be lightened, if not completely lifted. This is positive for the bottom line of many financial institutions and should be beneficial to the stock prices as well.

 

All of the positions purchased over the course of the past week are initial positions, meaning they are relatively small positions in the overall models. The positions will be added to in the future on market dips, providing the thesis of the initial purchases still holds true. It is my goal to get the models fully into the new positioning by Inauguration Day, if not by the end of the year. All of the funds and ETFs that have been purchased and will continue to be purchased are done so without trading costs or commissions, as always, and do not have any long term holding requirements to avoid penalties if the need arises to sell the position. Please feel free to call if you have any questions about the transformation that is underway in the models or if you would like more account-specific insight.

 

Market Statistics:

 

Last week was yet another interesting week for the US financial markets as investors pushed the Dow higher at the expense of the other two major indexes:

 

Index Change Volume
Dow 0.10% Average
S&P 500 -0.97% Average
NASDAQ -2.65% Average

 

Volume finally returned last week to the average levels that we have seen over the past year, something that has not occurred in the US since election week in early November. However, the performance of the three major indexes were very different as the technology heavy NASDAQ fell by 2.65 percent, driven by across-the-board selling, while the Dow managed to eke out a small gain, thanks in large part to the indexes’ exposure to energy, which had a stellar week with the OPEC deal being announced.

 

When looking at sectors, the continuation of the Trump rally sectors was very evident last week. The following were the top 5 and bottom 5 performers over the course of the previous week:

 

Top 5 Sectors Change   Bottom 5 Sectors Change
Oil & Gas Exploration 4.64%   Home Construction -3.46%
Energy 3.05%   Pharmaceuticals -4.37%
Broker Dealers 1.18%   Biotechnology -4.92%
Regional Banks 1.16%   Software -4.96%
Basic Materials 0.87%   Semiconductors -4.97%

 

Aside from the jump in Oil and Gas as well as Energy on the heels of the OPEC deal last week, the other sector movements on the positive side of the markets last week were continuations of the Trump rally. As financials stand to gain the most from deregulation, Broker Dealers and Regional Banks both jumped on to the top 5 list, and basic materials continued to push higher on hopes of “HUGE” infrastructure spending that could be undertaken by the new administration. On the flip side, high technology took a hit once again last week as the super sector took four of the bottom five spots. Home Construction rounded out the bottom five last week on fears that a slowdown in the US housing markets could be on the horizon as mortgage rates increase, thanks to hikes by the Fed.

 

Fixed income here in the US continued to adjust last week to the prospects of higher rates coming at the conclusion of the Fed’s December meeting:

 

Fixed Income Change
Long (20+ years) -1.01%
Middle (7-10 years) -0.05%
Short (less than 1 year) 0.02%
TIPS 0.07%

Global currency trading volume was above average last week as investors adjusted their positions to the prospects of the Italian vote failing as it did. Overall, the US dollar declined 0.72 percent against a basket of international currencies, ending its three-week streak of gains since election night. The best performing of the global currencies last week was the Colombian Peso, which gained 3.04 percent against the US dollar. The worst performance among the global currencies was seen in the Argentinean Peso, as it declined by 2.49 percent against the value of the US dollar.

Commodities were mixed last week as oil jumped higher, while the majority of the other commodities pushed lower:

Metals Change   Commodities Change
Gold -0.42%   Oil 11.13%
Silver 1.28%   Livestock -4.15%
Copper -2.13%   Grains -3.08%
      Agriculture -3.05%

The overall Goldman Sachs Commodity Index gained 5.15 percent last week, with the gain being driven by the movement in oil prices. Oil advanced by 11.13 percent, which was near the target amount that some traders put on the movement of oil if OPEC came up with a deal at the meeting. Even near the end of the meeting it looked highly unlikely that a deal would be formed and it took the markets by surprise when it materialized. Silver managed to turn in a gain despite Gold and Copper moving lower last week, which is unusual as Silver typically moves in the same direction as Gold, just to a smaller magnitude. Soft commodities were mainly negative, with Agriculture overall falling 3.05 percent, while Livestock declined 4.15 percent and Grains posted losses of 3.08 percent.

Top 2 Indexes Country Change   Bottom 2 Indexes Country Change
Caracas General Venezuela 37.40%   Sao Paulo Bovespa Brazil -2.02%
FTSE MIB Italy 3.46%   Johannesburg All South Africa -2.84%

Last week was a predominantly negative week in terms of international index performances, with only 31 percent of the global indexes experiencing gains for the week. The best performing index last week was found in Venezuela and was the Caracas General index, which turned in a gain of 37 percent for the week. This gain in the index brings the four-week gain up to near 100 percent, as the political situation within the country continues to be leaning toward tossing current President Maduro out of office early next year. The worst performing index for the week was found South Africa and was the Johannesburg All Shares Index, which turned in a loss of 2.84 percent.

The VIX last week experienced its second week in a row of relative complacency, gaining only 7.38 percent and managing to stay near the lowest points that we have seen over the past year. The VIX has been acting very strange over the past few weeks and at several points last week the VIX was showing losses, while the markets were moving down, which is the exact opposite of what one would expect to see. Maybe it is the large uncertainty over Trump or the way the 30-day contracts are rolled here at the end of the year, but whatever the reason, the movements of the VIX look suspect at this time. The current reading of 14.12 implies that a move of 4.08 percent is likely to occur over the next 30 days. The direction of the move over the next 30 days is unknown.

Economic Release Calendar:

 

Last week was a busy week for economic news releases, as there were several month-end releases that impacted the markets:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Slightly Positive 11/29/2016 GDP – Second Estimate Q3 2016 3.20% 3.00%
Positive 11/29/2016 Consumer Confidence November 2016 107.1 100
Neutral 11/30/2016 ADP Employment Change November 2016 216K 160K
Neutral 11/30/2016 Personal Income October 2016 0.60% 0.40%
Neutral 11/30/2016 Personal Spending October 2016 0.30% 0.50%
Neutral 11/30/2016 Core PCE Price Index October 2016 0.10% 0.10%
Positive 11/30/2016 Chicago PMI November 2016 57.6 52
Neutral 12/1/2016 ISM Index November 2016 53.2 52.1
Neutral 12/2/2016 Nonfarm Payrolls November 2016 178K 180K
Neutral 12/2/2016 Nonfarm Private Payrolls November 2016 156K 170K
Positive 12/2/2016 Unemployment Rate November 2016 4.60% 4.90%

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

 

Last week, the economic news releases started on Tuesday with the release of the second estimate for third quarter GDP here in the US, which came in slightly better than expected, increasing to 3.2 percent from the initial estimate of 3.0 percent. This, combined with the stellar consumer confidence figure of 107.1, while the market had been anticipating only 100, made for a good day on Tuesday in terms of the impact from the releases. The consumer confidence figure was surprising given the amount of fear that so many people seemed to be seeing after the election, but this fear seems to have been dampened down quickly and replaced with optimism. On Wednesday, personal income and spending came in mixed, with income a little higher than expected, while spending was a little lower. Core PCE prices came in low at 0.1 percent, but this was expected and had little impact on the markets. The surprise of the day on Wednesday was the Chicago PMI figure for the month of November, which came in at 57.6, significantly above the expected 52, as business conditions and manufacturing in the greater Chicago area picked up during the month. On Thursday, the overall ISM index for the month of November came in a little better than expected, but not high enough for the market to take much notice of. On Friday, the government released its monthly employment data, which held a downward surprise in the overall unemployment rate as it moved from 4.9 percent down to 4.6 percent, thanks in large part to holiday seasonal workers not filing for unemployment. Both public and private paroll numbers, missed expectations, but were largely ignored. Two negatives that were hidden in the government data on Friday was the fact that labor force participation declined by one tenth of a percent during November and wages also declined by a tenth of a percent during the month.

 

After such a busy week last week it was not surprising to see that this week is a very slow week for economic news released, with neither of the releases expected to have a notable impact on the overall markets:

 

Date Release Release Range Market Expectation
12/5/2016 ISM Services November 2016 55.60
12/9/2016 University of Michigan Consumer Sentiment Index December 2016 94.3

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

 

On Monday, the Services side of the ISM is set to be released with expectations that it will have increased much like the overall ISM released last week. Wrapping up the week on Friday this week is the release of the University of Michigan’s Consumer Sentiment Index for the month of December (first estimate). If this release is anything like the government confidence index last week, we could be in for a nice upside surprise. In addition to the two economic news releases this week, there are three speeches being made by Fed officials, which the markets will watch closely for any clues as to what the Fed is thinking going forward for interest rates.

 

Interesting Fact OPEC by definition is a cartel…

 

…so why can it legally operate in the US where being a cartel is highly illegal?

 

A 1979 U.S. District Court decision held that OPEC’s pricing decisions are essentially “governmental” acts of state, as opposed to “commercial” acts, and thus are beyond the legal reach of U.S. courts thanks to the Foreign Sovereign Immunity Act of 1976.

 

Source: newsmax.com

For a PDF version of the below commentary please click here weekly-letter-11-28-2016

Commentary quick take:

 

  • Major developments:
    • Markets continued the post-election rally
    • Thanksgiving holiday shortened trading week
    • Black Friday sales have come and gone

 

  • US
    • Black Friday has officially kicked off the holiday shopping season
    • Online sales increased at a faster rate than brick-and-mortar store sales

 

  • Politics:
    • President-Elect Trump continues to roll back some campaign threats
    • Several key cabinet positions have been filled
    • A recount has been ordered in Wisconsin and could move to other states

 

  • Earnings Season:
    • Third quarter earnings season has come to a close
    • Overall, third quarter earnings were positive
    • Expectations for the fourth quarter earnings season have lifted

 

  • Europe:
    • Italian banks are once again under pressure
    • Italian referendum vote on Sunday
    • PMI in Europe reached an 11 month high

 

  • Technical market view:
    • Trump rally moved into third week
    • VIX pushed lower
    • All three of the major US indexes have now broken out to the upside

 

  • Hybrid investments strategy update:
    • Sold HYMB
    • Sold part of hedging positions
    • Purchased SPHB
    • Made progress on shifting the models for the new administration

 

  • This week for the markets:
    • All about Black Friday retail sales
    • Speculation about Italy
    • Speculation about the December FOMC meeting

 

  • Interesting Facts: Fidel Castro

 

Major theme of the markets last week: Black Friday

funny-11-28-16

With last week being a shortened trading week due to the Thanksgiving holiday and with little else going on in the financial markets, Black Friday shopping was the focus of the media late in the week. Black Friday used to be the most important shopping day of the year for many retailers, but the prominence of Black Friday has been slowly eroding. We now have White Wednesday, Grey Thursday, Black Friday, Small Business Saturday and Cyber Monday. All we need is a fancy name for the Sunday after Small Business Saturday and the Tuesday directly after Cyber Monday and we would have a full seven days of goofy names for holiday shopping around Thanksgiving. The sales have started to be pushed earlier and earlier, with some of the best deals this year being online during Thanksgiving. Brick-and-mortar retailers are struggling to compete with online retailers as speed is not the advantage of the big box stores. Wait lists and special early e-mail links seem to have taken a large share of holiday sales thus far, especially due to the nature of how stores are running sales with only a few items being released at Black Friday prices every hour, essentially requiring that people stay at the store for hours to get all of the best deals. Early Black Friday 2016 numbers have been released by the National Retail Federate and show that 154 million shoppers made holiday purchases over the past extended weekend, yet the average dollar amount spent was only $289, down from $300 last year. The breakout of online shoppers versus brick-and-mortar shoppers continues to tilt in favor of online shopping, with 44 percent of the population shopping online, while only 40 percent went to a physical store to shop. Adobe put out an early report showing that $5 billion was spent online over the weekend with more than $1.2 billion being spent on smart phones as retail continues to push into the mobile universe.
US news impacting the financial markets:

 

With last week being the Thanksgiving holiday week there was very little in terms of financial news that impacted the markets. News of a recount being called for in Wisconsin by Green Party candidate Jill Stein gave some Hillary Clinton supporters hope that the state that was narrowly won by Trump could be flipped to Clinton; but this would have very little impact on the Electoral College figures. For Clinton to win, at least two other states would need to call for recounts and all go in favor of Clinton for her to garner enough electoral college votes to overtake Trump. If the recounts were initiated and did turn out to be in favor of Clinton, it seems highly likely that the Trump team would go on the legal offensive and get everything held up until inauguration day, at which point it is too late. In other political news, several other cabinet level positions were announced over the course of the previous week, with a few raising eyebrows. Staunch anti-Trump people such as Nikki Haley accepted positions, as well as fervent Hillary Clinton supporters. The rhetoric continued to soften on some of Trump’s key campaign positions as well, which is providing hope that he will not be as extreme as he once sounded. In reality, no one knows which Donald Trump will show up at the White House and be President. While everyone was listening to the political news last week, corporate earnings for the third quarter were being announced and we officially came to the end of the reporting season.

 

Companies that reported earnings last week focused on retail as we are now very close to the end of the third quarter reporting period and retailers are always some of the last companies to report earnings. Below is a table of the well-known companies that released earnings last week, with earnings that missed expectations highlighted in red, while earnings that beat expectations by more than 10 percent are highlighted in green:

 

Barnes & Noble -7% DSW 4% Jack In The Box 17%
Campbell Soup 5% GameStop 4% Palo Alto Networks 6%
Deere & Co 150% Hewlett Packard Enterprise 0% Seadrill 40%
Dollar Tree 3% Hormel Foods -2% Tyson Foods -23%

 

As you can see in the above table, the results last week were mixed. Deere & Co turned in a solid quarter after sales picked up more than anticipated in some of its heavy machinery lines. Seadrill turned in a solid quarter during the third quarter as the number of operating rigs increased here in the US. Tyson Foods saw sales decline while profits increased during the quarter, but this toxic combination was enough for the board of directors to force out the current CEO, Tom Hayes, who has been in the top position at the company since December of 2009. The company has been under legal pressure for the past few years as it has been accused of collusion and price fixing. Barnes & Noble continued to be under pressure during the third quarter as one of the largest brick-and-mortar book stores in the US continues to struggle to compete with online retailers.

 

According to Factset Research, we have seen 491 (98 percent) of the S&P 500 companies release their results for the third quarter of 2016. Of the 491 that have released, 72 percent have beaten earnings expectations, while 7 percent have met expectations and 21 percent have fallen short of expectations. When looking at revenue, of the companies that have reported, 54 percent of the companies have beaten estimates, while 46 percent have fallen short. Both the revenue figures as well as the earnings per share figures stayed relatively unchanged, when compared to the levels seen two weeks ago. The earnings figures above are within 1 percent of the 5-year average level, while the revenue figures are equal to the 5-year average level that we have seen on the S&P 500. The overall blended earnings growth rate so far for the S&P 500 is 3.2 percent, which is significantly better than the anticipated -2.2 percent going into the quarter. Now that we are within two percent of the total number of companies reporting earnings for the third quarter of 2016, we have come to the end of the third quarter reporting season. There are no companies of note reporting earnings looking out over the next three weeks so this will conclude the reporting on earnings for the third quarter. Looking ahead, earnings expectations for the fourth quarter of 2016 are currently 3.3 percent, while revenue growth expectations are 5 percent. There have been 105 companies that have reported earnings guidance for the fourth quarter and thus far 71 have issued negative guidance, while 34 have issued positive guidance. With how much the third quarter earnings missed expectations, this is starting to look like polling data in that it should be taken with a large grain of salt. We are now just a little over a month away from starting the fourth quarter earnings season.

 

Global news impacting the markets:

 

There was very little occurring globally last week in the financial markets as most of the markets were on a little pause as they waited for the US markets to begin trading normally, following the shortened trading week. Markit produced its latest reading on PMI in Europe, which the local markets took as positive. The chart to the right shows the Eurozone PMI with the solid blue line (left hand scale), while the quarterly change in GDP for the Eurozone is plotted with the bar chart (right hand scale). As you can see, the PMI figure has remained above the inflection point of 50 since late 2013 and at its latest reading is currently at an 11 month high. This time period has also correlated with an extended period of GDP growth on a quarterly percentage change basis. Both parts of the PMI data currently look strong, with manufacturing and services indexes hitting multiple month highs. However, there continues to be concern about several different parts of Europe, with the main concern being the Italian banking system and the referendum vote being held in Italy on December 4th.

pmi-eu-markit

The Italian referendum has been in the works for the past year with Prime Minister Matteo Renzi calling for a constitutional-reform referendum in which a change could be made in the constitution that would limit the power of the Senate, which is the upper house of parliament in Italy. The key provisions of what would change with a “Yes” referendum vote would be that the Senate could  no longer block legislation indefinitely, gets consulted on fewer matters and loses its power to topple the executive by calling a vote of “no confidence” in the government. Today’s 315 directly elected senators would be replaced by 100 regional councilors and mayors who are indirectly elected or appointed. This could increase the power of the Prime Minister and allow for more dramatic changes in Italy without the consent of the Senate. Why is this important to the financial markets around the world? PM Renzi took the bold step of saying that he would resign if the referendum did not pass. If he were to resign, the Five Star Movement would very likely come to power in Italy. The group is a populist political party that has said it does not want Italy to be a part of the Eurozone in its current form. A defeat of the referendum would essentially be a vote for the Five Star party and could build on the populist momentum that we have already seen play out in both the UK and the US. Italy has now entered a quiet period, as it always does in the week leading up to any major vote, but the final polls prior to the quiet period showed Renzi’s “Yes” vote holding a very small lead. However, we all know how unreliable polls can be and that small leads mean virtually nothing. The most dramatic impact on the global financial markets should Italy vote “No” on Sunday would be on the Euro; the common currency would immediately be called into question regarding whether it could even exist if one of the main pillars of the union (Italy) pulled out. Uncertainty would greatly increase in the region, which is already tense with the results of Brexit vote. Europe doesn’t need another fire lit at this time and this vote could be a catalyst for much larger and more impactful movements that could sweep across the region. With the speed at which the Italians count their votes, we should know the outcome of the vote by the time I am writing this commentary next week.

 

Technical market review:

 

Last week, the three major US market continued to push higher, despite the holiday trading week. In the charts below, the blue lines represent the closest level of support/resistance for each of the indexes, established by points the markets have touched in the past prior to bouncing higher. The red lines represent the upper edge of the most recent trading range on each of the three major indexes. For the VIX, the red line remains the rolling 52-week average level of the VIX.

4-charts-combined-11-28-16

Despite the low volume holiday trading week last week, both the S&P 500 (upper left pane above) and the NASDAQ (lower left pane above) managed to break out and make new highs above their most recently trading ranges. These two are following the lead of the Dow, which broke out to the upside almost immediately following Trump’s surprising Election Day victory. While the increases that have been seen on the main indexes since the election have been impressive, they have been done on very weak changes in the fundamentals that typically drive the market movements over a longer period of time. While the indexes certainly could continue to run higher, it is looking more and more likely that the market will correct and give back a portion of the recent gains as investors book short term profits due to the uncertainty of what could occur when Trump officially becomes President on Friday, January 20th of 2017. The VIX largely moved sideways last week, falling a little in what was a very calm trading week for the index, as the VIX is known for spiking higher then dropping precipitously at seemingly random intervals.

 

Hybrid model performance and update

For the shortened trading week ending on 11/25/2016, returns in the hybrid hypothetical models* (net of a 1% annual management fee) were as follows:

 

  Last Week 2016 YTD Since 6/30/2015
Aggressive Model 0.94% 0.72% 5.05%
Aggressive Benchmark 1.24% 3.61% -1.66%
Growth Model 0.71% 0.86% 4.23%
Growth Benchmark 0.97% 2.99% -1.02%
Moderate Model 0.45% 0.92% 3.67%
Moderate Benchmark 0.69% 2.28% -0.49%
Income Model 0.30% 0.90% 3.54%
Income Benchmark 0.35% 1.33% 0.01%
S&P 500 1.44% 8.29% 7.28%

*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 last week to the hybrid models, with the first changes being across all models and the subsequent changes being very model specific. The first change was to reduce the hedging positions in both the Dow and the S&P 500 as the risks in our specific stocks look to have diminished materially now that we are fully out of earnings season and moving into the end of the year. Half of each of the hedging positions were sold last week with the other half likely to be sold early in the week this week if the markets continue to perform favorably. The second change across all models last week was the selling of the High Yield Muni bond ETF (HYMB). The fund failed to live up to expectations in terms of market movements in light of the election results. Please remember that all of the ETFs that we trade are done on the no transaction fee and no commission platform at Schwab, so there are no costs to investors for adjusting positions within the models. Another set of changes made in the models last week was the purchase of the Powershares High Beta ETF (SPHB), which invests in higher volatility stocks that are members of the S&P 500. The purchase was an initial, very small one percent position in both the Aggressive and Growth models. I hope to fill the position over the coming days and weeks as opportunities arise. Going forward, I am looking at increasing positioning in the global short term high yield bond fund and picking up positions in both small and midcap value and in financials. The small and midcap value investments are a play on the US likely being seen as the strongest economy in the world and on most small and midcap companies being based and operating largely here in the US. Financials will be an investment on the deregulation of an industry that has been under fire for many years from various aspects of the political administration. While there is certainly a need for regulation, rolling back some of the onerous regulations of the past few years could greatly reduce regulatory costs to banks, which in turn could increase profitability. You may notice a general theme in the coming weeks of repositioning the models for the environment we will likely see with the next administration. Please be patient as we make adjustments in the models and feel free to call with any questions. Bear in mind that adjustment made to the models are always done with an eye toward managing risks in the overall models and that incremental adjustments will be made rather than just jumping into something with both feet, which can either go well or very badly, depending on where one jumps.

 

Market Statistics:

 

Last week the market movements were a little surprising as many investors held back on making any big adjustments due to the low volume seen during the holiday week:

 

Index Change Volume
Dow 1.51% Below Average
S&P 500 1.44% Below Average
NASDAQ 1.11% Below Average

 

Volume was very low last week, coming in just under 80 percent of average, which is about what you would expect, having one less trading day out of five during the week. Several areas of the markets that had been performing well since the election started to stumble, while areas if the market that had been underperforming finally turned in a good week.

 

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

 

Top 5 Sectors Change   Bottom 5 Sectors Change
Telecommunications 4.09%   Pharmaceuticals -0.08%
Materials 3.24%   Biotechnology -0.09%
Oil & Gas Exploration 3.23%   Software -0.12%
Aerospace & Defense 2.86%   Healthcare -0.60%
Industrials 2.35%   Medical Devices -0.84%

 

Healthcare and its ancillary sectors were areas of the markets that experienced declines last week as the run since the election finally became overextended and came back down a little. On the positive side of investments last week, Telecommunications, Materials and Oil and Gas made up the top three spots as investors jumped onto some merger and acquisition activity and the hope of an OPEC deal to limit production. Aerospace and Defense continued to ride high last week as spending by the Trump administration looks to be particularly heavy in these areas; the sector stands to benefit the most from some of his announced policies.

 

Fixed income here in the US continued to adjust last week to the prospects of higher rates coming at the conclusion of the Fed’s December meeting:

 

Fixed Income Change
Long (20+ years) -0.02%
Middle (7-10 years) -0.26%
Short (less than 1 year) 0.03%
TIPS -0.18%

Global currency trading volume was below average last week as US investors took some time off. Overall, the US dollar advanced 0.19 percent against a basket of international currencies, giving the green back a nearly 5.7 percent increase over just the past three weeks. If this increase in the US dollar continues, we could start to see material impacts on some of the other major global economies that rely on the US importing their products. The best performing of the global currencies last week was the Ukraine Hryvnia, which gained 2.63 percent against the US dollar. The worst performance among the global currencies was seen in the Egyptian Pound, as it declined by 8.13 percent against the value of the US dollar. The decline in the Egyptian pound seems to be nothing more than profit taking by currency traders after such a large increase was seen in the currency over the past few weeks.

Commodities were mixed last week as Copper jumped higher, along with most of the other soft commodities:

Metals Change   Commodities Change
Gold -2.21%   Oil 0.10%
Silver -0.64%   Livestock 4.38%
Copper 8.83%   Grains 2.24%
      Agriculture 0.69%

The overall Goldman Sachs Commodity Index gained 2.10 percent last week, with little of the gain being attributed to the movement in Oil. Oil advanced by 0.10 percent as there was an OPEC meeting at the end of the week last week that goes into the first part of this week, with speculation that OPEC may or may not be able to reach a production deal. These meetings seem to have late night decisions made, if any decisions are made at all, so we will have to wait and see what, if anything, OPEC comes up with. Copper moved right back into wild trading last week after taking a little respite two weeks ago, jumping higher by 8.83 percent last week. Any time there is news about industrial production increasing, Copper seems to be the large beneficiary of the news. Gold and Silver continued their trends of moving lower, falling 2.21 and 0.64 percent, respectively. Soft commodities were positive, with Agriculture overall gaining 0.69 percent, while Livestock gained 4.38 percent and Grains posted gains of 2.24 percent.

Top 2 Indexes Country Change   Bottom 2 Indexes Country Change
Caracas General Venezuela 6.0%   BIST 100 Turkey -1.69%
Merval Argentina 4.8%   PSEi Philippines -2.52%

Last week was a predominantly positive week in terms of international index performances, with 86 percent of the global indexes experiencing gains for the week. The best performing index last week was found in Venezuela and was the Caracas General index, which turned in a gain of 6 percent for the week. This gain in the index brings the three-week gain up to more than 56 percent, as the political situation within the country continues to be leaning toward tossing current President Maduro out of office early next year. The worst performing index for the week was found in the Philippines and was the PSEi, which turned in a loss of 2.52 percent.

After muted trading two weeks ago, relative to what had been happening for the prior month, the VIX was even more docile last week, moving by less than four percent as it gave up 3.97 percent for the week. Holiday shopping figures that come out over the next few weeks could impact the VIX, but more likely the situation with the Italian vote on Sunday could produce the largest catalyst for VIX movement. The current reading of 12.34 implies that a move of 3.56 percent is likely to occur over the next 30 days. The direction of the move over the next 30 days is unknown.

Economic Release Calendar:

 

Last week was a slow week for economic news releases, but it seemed pack as the releases were only released on two days:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Neutral 11/22/2016 Existing Home Sales October 2016 5.60M 5.40M
Positive 11/23/2016 Durable Orders October 2016 4.80% 1.10%
Positive 11/23/2016 Durable Orders, Ex- Transportation October 2016 1.00% 0.30%
Slightly Positive 11/23/2016 University of Michigan Consumer Sentiment Index November 2016 93.8 91.6
Neutral 11/23/2016 New Home Sales October 2016 563K 587K
Neutral 11/23/2016 FOMC Minutes Previous Meeting N/A N/A

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 October, which came in slightly above expectations, but not by enough for the market to take notice. The big surprises of the week came on Wednesday with the release of the durable goods orders for the month of October, which came in significantly higher than the market had been expecting. Overall orders increased by 4.8 percent, which is the fastest pace for the indicator that we have seen since April of 2015. When durable goods orders excluding transportation were released, the figure, while positive, was a little less positive than the overall order figure. Later during the day on Wednesday, the University of Michigan’s Consumer Sentiment Index slightly beat expectations, signaling that the election results appear to be having little tangible impact on US consumers. Wrapping up the week last week on Wednesday was the release of new home sales for the month of October and the FOMC meeting minutes, which both held no information that the market took notice of at the time of the releases.

 

This week is an important week for economic news releases as the data released will likely solidify the Fed’s interest rate decision that will be made at the December meeting:

 

Date Release Release Range Market Expectation
11/29/2016 GDP – Second Estimate Q3 2016 3.00%
11/29/2016 Consumer Confidence November 2016 100
11/30/2016 ADP Employment Change November 2016 160K
11/30/2016 Personal Income October 2016 0.40%
11/30/2016 Personal Spending October 2016 0.50%
11/30/2016 Core PCE Price Index October 2016 0.10%
11/30/2016 Chicago PMI November 2016 52
12/1/2016 ISM Index November 2016 52.1
12/2/2016 Nonfarm Payrolls November 2016 180K
12/2/2016 Nonfarm Private Payrolls November 2016 170K
12/2/2016 Unemployment Rate November 2016 4.90%

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

 

This week the economic news releases kick off on Tuesday with the release of the second estimate of third quarter GDP here in the US. This release will be very important as the first estimate was 3 percent. With the positive earnings results that we saw during the third quarter, it would not be surprising to see this GDP estimate revised higher. This could be a positive catalyst for the financial markets and also increase the likelihood of a rate hike in December. Consumer confidence as measured by the government for the month of November is also set to be released on Tuesday and should indicate higher confidence, despite the election results, much like the University of Michigan’s data released last week. On Wednesday, personal income and spending are both set to be released with small gains expected on both of the releases. The Core PCE price index is also set to be released on Wednesday and, being the Fed’s favored measure of inflation, could have a noticeable impact on the markets. The Chicago area PMI is set to be released later during the day on Wednesday, but unless this release comes in below 50, which is highly unlikely, it will largely be ignored by the markets. On Thursday, the ISM index for the month of November is set to be released with expectations of a very small increase when compared to the level seen in October. Much like the PMI figures released on Wednesday, it would take a reading under 50 on this index for the markets to even take notice. On Friday, the overall unemployment rate for the month of November is expected to remain steady at 4.9 percent, which is the same level seen in October; the payrolls figures are both expected to be slightly better in November than they were in October. As always, the labor force participation rate and wage growth will also be reported and could have a greater impact on the markets than the headline unemployment rate and payroll figures. If we see strong employment data released on Friday and solid gains on the PCE index on Wednesday, it should solidify a rate hike at the December meeting of the FOMC.

 

Interesting Fact Fidel Castro

 

With the announcement of Fidel Castro’s passing on Friday night, I thought it would be appropriate to include facts about him this week.

 

  • Castro holds the Guinness Book of Records’ title for the longest speech ever delivered at the United Nations: 4 hours and 29 minutes, on Sept. 29, 1960. His longest speech on record in Cuba was 7 hours and 10 minutes in 1986 at the III Communist Party Congress in Havana.

 

  • Castro claims he survived 634 attempts on his life, mainly masterminded by the U.S. Central Intelligence Agency. They involved poison pills, a toxic cigar, exploding mollusks, a chemically tainted diving suit and powder to make his beard fall out so as to undermine his popularity.

 

  • Despite CIA plots, a US-backed exile invasion at the Bay of Pigs and four and a half decades of economic sanctions, Castro outlasted nine US presidents, from Eisenhower to Clinton, and faced increased hostility under George W. Bush, who tightened enforcement of financial sanctions and a travel ban, both of which have now largely been lifted by the Obama administration.

 

Source: http://www.independent.co.uk/news/world/americas/weird-and-wonderful-the-facts-about-fidel-castro-784139.html

For a PDF version of the below commentary please click here weekly-letter-11-21-2016

Commentary quick take:

 

  • Major developments:
    • Markets continue to adjust to President-Elect Trump
    • Fed Chair Yellen testified before Congress
    • Odds of a rate hike in December now at 100%

 

  • Politics
    • Trump back pedaled on some of his policies
    • Hard time filling out his administration

 

  • Earnings season:
    • 95 percent complete for S&P 500
    • Blended earnings on the S&P 500 stands at 3 percent

 

  • US Fed:
    • Chair Yellen’s testimony signaled a rate hike in December
    • Reiterated slow and gradual hikes going forward
    • Markets pricing in four hikes in 2017

 

  • Europe:
    • Italian banks are once again under pressure
    • ECB maintains cautious outlook
    • Brexit and Trump uncertainty weighing

 

  • Technical market view:
    • Trump rally moved into second week
    • VIX pushed lower
    • S&P 500 and NASDAQ have moved into an area of significant resistance

 

  • Hybrid investments strategy update:
    • Purchased PGHY
    • Bounce back in several core stock positions
    • Wal-Mart earnings moved the stock

 

  • This week for the markets:
    • Thanksgiving shortened trading week
    • Trump policies will come into more focus
    • Black Friday holiday shopping

 

  • Interesting Facts: Thanksgiving

 

Major theme of the markets last week: Ready for rate blast off?

funny-2-11-21-16

The major theme of the financial markets last week was Fed Chair Janet Yellen’s testimony before Congress and the revelation that the Fed is now almost certainly going to be raising rates at the December meeting. With the fear of appearing too political by raising rates at the November meeting now behind the Fed, Chair Yellen gave prepared remarks about the current state of the US economy, in which she outlined pretty clearly that baring some anomaly in the data that comes out over the next three weeks, the Fed will be increasing rates at the December meeting. In fact, the Fed watch numbers currently have the odds of a rate hike at 100 percent. With rates moving higher and President Trump filling in the blanks in his administration in terms of personnel, we could be in for an exciting time in the financial markets, both on fixed income and equity investments. If the Fed manages to raise rates in December it will be the only hike it pulled off during 2016. Going into the year, you may remember that many Fed officials were calling for as many as four hikes throughout 2016. This, interestingly enough, is the number of hikes the markets are now pricing in for 2017, despite all of the uncertainty about the situation in Washington DC. The year 2017 is setting up to be a very interesting year, both here in the US and around the world.
US news impacting the financial markets:

 

Federal Reserve Chair Janet Yellen headlined the financial news last week as she testified before Congress on Thursday. She was speaking before the Joint Economic Committee and provided her prepared remarks, followed by several hours of questions and answers from both sides of the political aisle. The following short paragraph in her prepared remarks is what Wall Street really latched on to:

 

“At our meeting earlier this month, the Committee judged that the case for an increase in the target range had continued to strengthen and that such an increase could well become appropriate relatively soon if incoming data provide some further evidence of continued progress toward the Committee’s objectives. This judgment recognized that progress in the labor market has continued and that economic activity has picked up from the modest pace seen in the first half of this year. And inflation, while still below the Committee’s 2 percent objective, has increased somewhat since earlier this year. Furthermore, the Committee judged that near-term risks to the outlook were roughly balanced.”

 

Shortly after she said the above paragraph, the odds of a rate hike at the December meeting, which is only a few short weeks away, went to 100 percent. The odds of rates moving higher at meetings in 2017 also increased. Four rate hikes during 2017 is likely. With near certainty of a rate hike in December, the bond market in the US adjusted lower and losses that started with the surprise Trump victory seemed to carry over a second week last week. Corporate earnings continued to impact the overall markets last week as we continue to see a strong third quarter for corporate America.

 

Companies that reported earnings last week focused on the retail US consumer as we are now very close to the end of the third quarter reporting period and retailers are always some of the last companies to report earnings. Below is a table of the well-known companies that released earnings last week, with earnings that missed expectations highlighted in red, while earnings that beat expectations by more than 10 percent are highlighted in green:

 

Abercrombie & Fitch -89% Famous Dave’s of America -90% Ross Stores 11%
Agilent Technologies 13% Foot Locker 2% Salesforce.com 0%
Best Buy 32% Gap 0% Staples 0%
Buckle -6% Gordmans Stores pushed Stein Mart -50%
Cisco Systems 2% Home Depot 1% Target 25%
Dick’s Sporting Goods 14% J M Smucker 6% TJX Companies 5%
Diebold 17% Lowe’s -8% Wal Mart Stores 2%

 

One theme last week in the earnings was that the big box and discount retailers performed well during the third quarter. Ross stores turned in the top performance of the group last week, beating expectations by 11 percent, while rival TJ Maxx beat expectations by only 5 percent. Wal-Mart and Target were both closely watched, with Target seeing a higher upside surprise than Wal-Mart, but both turned in solid quarters. Both companies forecast strong sales around the holiday season, which officially kicks off on Friday morning across the US with Black Friday sales. Higher-end clothing retailers Abercrombie & Fitch and Buckle both struggled during the quarter as fall and the first part of winter was warmer than expected across much of the US, leading to less early season shopping for winter clothing. With such poor performance in the third quarter, the companies will likely see better than anticipated sales in the fourth quarter as consumers finally start to feel the colder temperatures and shift their wardrobes to winter attire. The home improvement sector’s two main companies, Home Depot and Lowe’s, both reported earnings last week with Home Depot earning slightly more than expected, while Lowe’s fell short. Both companies blamed the lack of sales on the weather in the US, much like the higher-end retail clothing companies.

 

According to Factset Research, we have seen 477 (95 percent) of the S&P 500 companies release their results for the third quarter of 2016. Of the 477 that have released, 72 percent have beaten earnings expectations, while 7 percent have met expectations and 21 percent have fallen short of expectations. When looking at revenue, of the companies that have reported, 55 percent of the companies have beaten estimates, while 45 percent have fallen short. Both the revenue figures as well as the earnings per share figures stayed relatively unchanged, when compared to the levels seen two weeks ago. The earnings figures above are within 1 percent of the 5-year average level, while the revenue figures are equal to the 5-year average level that we have seen on the S&P 500. The overall blended earnings growth rate that has been seen so far for the S&P 500 is 3.0 percent, which is significantly better than the anticipated -2.2 percent that was expected going into the quarter. With only 5 percent of the companies in the S&P 500 needing to report earnings, it is becoming increasingly unlikely that the above mentioned figures will change by a material amount between now and the end of the reporting season.

 

With Thanksgiving occurring on Thursday this week, it is not surprising to see a very low number of companies reporting earnings this week as we move into the final three weeks of third quarter earnings season. The table of well-known companies below shows the companies that have the greatest potential to move the markets highlighted in green:

 

Barnes & Noble DSW Jack In The Box
Campbell Soup GameStop Palo Alto Networks
Deere & Co Hewlett Packard Enterprise Seadrill
Dollar Tree Hormel Foods Tyson Foods

 

Consumer facing retail companies once again make up the majority of companies that are reporting earnings this week. Deere & Co is one company that will be closely watched by Wall Street this week as its products are used in many different businesses and slowdowns in a variety of sectors can be seen early on in the company’s revenue figures. Three of the major food producers in the country (Tyson, Hormel and Campbell’s) report earnings this week with fairly lofty expectations for the third quarter, thanks in large part to declining commodities prices, which were mostly not passed along to the end consumer. The final news last week here in the US that impacted the financial markets was political as President-Elect trump continues to fill out his cabinet.

 

Keeping with the political outsider theme that he ran with for much of his campaign, President-Elect Trump moved forward last week with filling a few key spots in his administration. He appointed Jeff Sessions as Attorney General. He picked Lt. General Michael Flynn as his national security adviser; a controversial pick as he was dismissed by President Obama. In former Secretary of State Colin Powell’s words, General Michael Flynn was “abusive with staff, didn’t listen, worked against policy, bad management.” Add this pick to Steve Bannon from Breitbart media as the White House Chief Strategist and it is easy to see why many people on the left are scared of what could come out of the new administration. One positive thing that has come out of Trump being elected is a bull market run in the financial markets that, for the most part, investors will not complain about. However, it appears the rally in the market could be short lived as much of the gains of the past two weeks have been predicated on Trump actually being able to get the US economy growing faster than it has the past few years and on inflation picking up. While many of President-Elect Trump’s ideas sound good to the financial markets, there seems to be more and more hesitation about how he will pay for everything he is talking about doing. Fears of the national debt ballooning seems to be appropriate if all of the tax cuts and spending increases occur and even then it will only be possible if Trump works with Congress enough to get a budget passed.

 

Global news impacting the markets:

 

Two different parts of the world made headlines last week that impacted some of the foreign markets, with the first being Europe and the second being Asia. On Thursday, the European Central Bank (ECB) released its detailed meeting minutes from the previous meeting. While there were a number of positives that the committee pointed out during the meeting, there continued to be an overarching cautious tone set in the minutes. In light of the meeting minutes, the odds of any substantial changes in monetary policies from the ECB moved lower over the course of the week. Potentially in the cards for the December meeting is an extension of the current quantitative easing program that the ECB is undertaking. This was anticipated at the last meeting and did not materialize. This could help boost the slow growth and potentially increase the painfully slow inflation rates currently being seen across much of Europe. Two big wild cards at the meeting were the outcomes of the Brexit vote and the US presidential election. The Brexit remains unclear since the high court in the UK ruled that the Prime minister does not have the authority to trigger article 50. This has led the government to contest the ruling in a court of appeals in early December and PM Theresa May to saying that she will be moving forward with article 50 in March of 2017; effectively starting the two year clock on the UK’s leaving the EU. Pertaining to the US election, even knowing the outcome of the election, it will be no less of a wild card at the December meeting as there is a lot of uncertainty over what President Trump will do with trade agreements and NATO, just to name two topics that impact both the EU and the US. Europe was not the only region of the world to make headlines last week in the media as Asia made both positive and negative headlines.

 

Fears over what President Trump could do in office are as real in Asia as they are for the ECB, as much of Asia’s regional economy depends on trade with the US. While the US moving into an all-out trade war seems unlikely, there could be significant pressure on the region to allow for US manufacturing to become more competitive. We have seen wild moves in both equity markets in Asia as well as currencies and bonds in light of the US election and looming rate hike from the US Fed. The news out of Asia last week was not all negative, however. Japan reported its Q3 GDP figure at 2.2 percent, much higher than the expected sub one percent reading and industrial output in China was higher than expected in the September data. A negative in the data out of China last week, however, was that retail sales for the month of October missed expectations of 10.7 percent, coming in at a 10 percent growth rate on a year-over-year basis. This double digit gain in retail sales is significant because it is one data point that points to the success of the Chinese government’s willingness to transform the Chinese economy from an export driven economy into a more internal consumption based economy.

 

Technical market review:

 

Last week’s market performance was almost the opposite of what we saw two weeks ago on the announcement of the Trump victory, with the Dow consolidating a bit for the week, while the Technology heavy NASDAQ pushed higher. In the charts below, the blue lines represent the closest level of support/ resistance for each of the indexes, established by points the markets have touched in the past prior to bouncing higher. The red lines represent the upper edge of the most recent trading range on each of the three major indexes. For the VIX, the red line remains the rolling 52-week average level of the VIX.

4-charts-combined-11-21-16

As you can see, the Dow (upper right pane above) remains well above the upper-most resistance level from the indexes’ most recent trading range after jumping higher on the Trump win. The large increase in the Dow is a bit unusual when looking back in the historical data as the Dow is composed mainly of large blue chips companies that are slow movers in both business and the markets. It appears that either the other two indexes have a large amount of catch-up to play or that the Dow has some downside building as it needs to move down closer to the other two indexes. Both the NASDAQ (lower left pane above) and the S&P 500 (upper left pane above) now find themselves near the top end of their trading ranges with both essentially bumping the red line. If we can get both the S&P 500 and the NASDAQ to break above their respective trading ranges, it would be a positive sign for the rally seen over the past two weeks, but it looks like the rally may be starting to fade. The trading this week will largely be ignored by technical investors as volume is expected to be very light as money managers and investors alike take a break from the markets for the Thanksgiving holiday. The VIX is pricing this type of slowdown in market movements as well as it is now right back down at the low levels that we saw well before all of the rhetoric of the US election.

 

Hybrid model performance and update

 

For the trading week ending on 11/18/2016, returns in the hybrid hypothetical models* (net of a 1% annual management fee) were as follows:

 

  Last Week 2016 YTD Since 6/30/2015
Aggressive Model 0.52% -0.23% 4.06%
Aggressive Benchmark -0.03% 2.34% -2.87%
Growth Model 0.23% 0.14% 3.48%
Growth Benchmark -0.02% 2.00% -1.96%
Moderate Model -0.92% 0.46% 3.19%
Moderate Benchmark -0.01% 1.57% -1.17%
Income Model -0.27% 0.59% 3.22%
Income Benchmark 0.00% 0.98% -0.32%
S&P 500 0.81% 6.75% 5.76%

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

 

Last week there was one change made in the Hybrid models and that was the addition of a new fund, the Powershares Global High Yield Short Duration bond fund (ticker PGHY). I’m currently in the process of moving toward this fund in the models as the fund has a very strong dividend payout of nearly 6 percent and is in an area of the fixed income market that could benefit from the current situation, both in Washington DC and from the Fed. The positions purchased last week are one third of a full position and the position will be filled as positions in other holdings are sold. In the stocks within the hybrid models we continue to move through earnings season with only a few more reports to go, one of which is occurring this week with Hormel. Hormel should have had a good third quarter as its raw material costs declined during the quarter, but the results will really depend on consumer tastes during the quarter. The company is currently on my “watch closely” list to make sure that things are going in the correct direction from a business standpoint. Wal-Mart moved lower this week after announcing better than expected earnings for the third quarter and reaffirming its outlook for the remainder of the year. The street was expecting more lofty results after stronger than expected results were posted by some competitors. Overall fundamentals for the company remain strong as its online sales unit picked up during the third quarter as it attempts to steal some market share away from competitors such as Amazon. Cash levels in the models will likely be coming down over the coming weeks as investment opportunities present themselves and the tactical portion of the models position for what will likely turn in to a year-end Santa Rally, after what looks like a rate hike gift from the Fed.

 

Market Statistics:

 

As mentioned above, the movement of the three main US indexes last week was almost the opposite of what we saw two weeks ago in reaction to the outcome of the Presidential election:

 

Index Change Volume
NASDAQ 1.61% Average
S&P 500 0.81% Average
Dow 0.11% Average

 

Volume, as expected, moderated a lot from the very high levels we saw following the US election two weeks ago to the average volume levels last week. Corporate earnings announcements and a moderation in some of Trump’s stances seemed to be the primary driving forces behind last week’s market movements.

 

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

 

Top 5 Sectors Change   Bottom 5 Sectors Change
Semiconductors 4.85%   Biotechnology -1.14%
Regional Banks 3.99%   International Real Estate -1.22%
Broker Dealers 3.90%   Materials -1.62%
Healthcare Providers 3.79%   Healthcare -1.76%
Home Construction 3.47%   Pharmaceuticals -2.19%

 

Financial related sectors of the financial markets made up 2 of the top five performing sectors last week as speculation about deregulation of the financial industry continued to have a trickledown effect on the groups. Semiconductors popped last week, thanks to a large merger announcement as well as continued and increasing demand for semiconductors in many of the latest computer chips that run all of the latest electronic devices. Healthcare providers made it onto the top 5 list, thanks to a bump seen from Trump walking back his once adamant full repeal of the Affordable Care Act (ACA). On The flipside last week, Biotechnology and Pharmaceuticals made the switch from winning sectors two weeks ago to losing sectors last week; the outside gains realized after the Trump victory were short lived because people still think the industry has a common practice of price gauging, which means continued negative press, regardless of who occupies the White House. The other three sectors that made the bottom sector performance last week were almost random in their reasons for doing so with Materials being just a slight pull back after running so much, International Real Estate seeming to move on the value of the dollar and Healthcare moving for no apparent reason.

 

With the prospects of higher rates coming in December, fixed income last week moved lower in the US with the middle of the curve seeing the largest declines:

 

Fixed Income Change
Long (20+ years) -0.98%
Middle (7-10 years) -1.36%
Short (less than 1 year) 0.01%
TIPS -0.81%

Global currency trading volume was above average last week, as investors around the world pushed the US dollar higher. Overall, the US dollar advanced 2.34 percent against a basket of international currencies, giving the green back a nearly five and a half percent increase over just the past two weeks. The best performing of the global currencies last week was the Egyptian Pound, as it gained 1.65 percent against the US dollar. Much of this gain was seen as a small bounce after the currency fell by more than 40 percent three weeks ago. The worst performance among the global currencies was seen in the Japanese Yen, as it declined by 3.74 percent against the value of the US dollar. Much of the decline in the Yen was due to uncertainty over a future trade war with the US and the potential negative impact that such a war would have on exporters within Japan.

Commodities were mixed last week as oil jumped higher, while metals continued to push lower:

Metals Change   Commodities Change
Gold -1.67%   Oil 5.63%
Silver -4.49%   Livestock 1.29%
Copper -1.49%   Grains 1.06%
      Agriculture -0.10%

The overall Goldman Sachs Commodity Index gained 2.59 percent last week, thanks in large part to the more than 5 percent gain in the price of oil. Oil advanced by 5.63 percent as there are now rumors that a production freeze could be in the works before the end of the year by OPEC. It seems ludicrous that oil should move as much as it does on nothing but rumors, some of which I am sure are started by OPEC members itself just to boost prices. After jumping more than 12 percent two weeks ago it was not surprising to see that Copper gave back a little of the gains last week, falling 1.49 percent during the week. Gold and Silver continued their trends of moving lower, falling 1.67 and 4.49 percent, respectively. Soft commodities were mixed with Agriculture overall falling 0.10 percent, while Livestock gained 1.29 percent and Grains posted gains of 1.06 percent.

Top 2 Indexes Country Change   Bottom 2 Indexes Country Change
Caracas General Venezuela 9.3%   WIG Poland -3.17%
CASE 30 Egypt 5.0%   FTSE MIB Italy -3.25%

Last week was a mixed week in terms of international index performances, with 55 percent of the global indexes experiencing gains for the week. The best performing index last week was found in Venezuela and was the Caracas General index, which turned in a gain of 9.3 percent for the week. This gain in the index brings the two-week gain up to more than 50 percent, as the political situation within the country seems to be leaning toward tossing current President Maduro out of office early next year. The worst performing index for the week was found in Italy and was the FTSE MIB, which turned in a loss of 3.25 percent. Italy once again saw international money managers focus on the weakness in its banking system and on the upcoming election, upon which the current Prime Minister has staked his office.

After back to back weeks of the VIX moving by more than 40 percent, last week’s decline of only 9.3 percent seems almost tame. It appears the VIX is not reading much volatility into the markets over the next 30 days as the current Obama administration starts to hand off control of the US government to the incoming Trump administration. Much of the lowered expectations of risk probably has a good deal to do with the time of year we are in when people are generally more upbeat about the holiday season and, in turn, the economy overall and not looking for potential negatives that could impact the financial markets. The current reading of 12.85 implies that a move of 3.71 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 news releases that were released were average in terms of number, but lacking in terms of impact:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Slightly Positive 11/15/2016 Retail Sales October 2016 0.80% 0.60%
Slightly Positive 11/15/2016 Retail Sales ex-auto October 2016 0.80% 0.50%
Slightly Positive 11/15/2016 Empire Manufacturing November 2016 1.5 -0.5
Slightly Negative 11/16/2016 PPI October 2016 0.00% 0.30%
Slightly Negative 11/16/2016 Core PPI October 2016 -0.20% 0.20%
Neutral 11/17/2016 CPI October 2016 0.40% 0.40%
Neutral 11/17/2016 Core CPI October 2016 0.10% 0.20%
Neutral 11/17/2016 Housing Starts October 2016 1323K 1178K
Neutral 11/17/2016 Building Permits October 2016 1229K 1200K
Neutral 11/17/2016 Philadelphia Fed November 2016 7.6 7.0

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

 

Last week the economic news releases started on Tuesday with the release of the retail sales figures for the month of October, with both overall retail sales and retail sales excluding auto sales coming in with gains of 0.8 percent, slightly higher than anticipated, but not strong enough to signal strong growth in the US economy. Much to some investors’ relief, the Empire Manufacturing index, which was also released on Tuesday, came in with a positive reading of 1.5 compared to the -0.5 reading that was expected. This 1.5 reading signifies very slow growth in manufacturing in the US, but growth nonetheless. On Wednesday, the Producer Price Index (PPI) was released with both core and overall prices at the producer level coming in lower than expected, thanks in large part to reduced raw material input costs. On Thursday the Consumer Price Index (CPI) for the month of October came in in-line with market expectations and had very little overall impact on the markets or on the Fed’s thinking about the future timing of raising interest rates. Housing starts and building permits both for the month of October also were released on Friday, with both figures coming in close to market expectations. Wrapping up the day on Thursday was the release of the Philadelphia Fed Index for the month of November, which came in very close to expectations of 7 when it posted a reading of 7.6 and had little overall impact on the markets. Getting an honorable mention this week, despite it not being in the weekly table, was the release of the weekly jobless claims, which posted a reading of 235,000, the lowest level that we have seen on the data set going back 43 years to 1973. Continuing jobless claims also continued to decline last week, posting at levels not seen in the last 16 years. These two figures are not included in the weekly table as they very rarely do anything of significance, but with these two milestones being hit, I thought it would be prudent to mention them.

 

This week is a shortened trading week with a much smaller than typical economic news release table:

 

Date Release Release Range Market Expectation
11/22/2016 Existing Home Sales October 2016 5.40M
11/23/2016 Durable Orders October 2016 1.10%
11/23/2016 Durable Orders, Ex- Transportation October 2016 0.30%
11/23/2016 University of Michigan Consumer Sentiment Index November 2016 91.6
11/23/2016 New Home Sales October 2016 587K
11/23/2016 FOMC Minutes Previous Meeting N/A

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

 

This week the economic news releases start on Tuesday with the release of the existing home sales for the month of October, which is expected to post a reading of 5.4 million units during the month. Wednesday is a busy day, but it is also the last day of the week for releases as Durable goods orders for the month of October kicks things off. Overall durable goods orders are expected to have increased by 1.1 percent during the month, while orders excluding transportation are expected to have increased by 0.3 percent. Both of these figures are very low when compared to historical figures for this stage in the economic cycle. New home sales as well as the minutes from the November FOMC meeting will be released later during the day on Wednesday, but it is unlikely that by this time many people will still be at work watching the markets and reacting to the releases. Wrapping up the week on Wednesday this week is the middle of October reading for the University of Michigan’s Consumer sentiment index, which is expected to be unchanged from the end of October reading. Remember that this reading was largely taken prior to the outcome of the US election being known, so we could see a sizeable difference at the end of November reading in two weeks, once the impact of the election is calculated in the figure. With this being a holiday week, you may expect that there are no scheduled speeches by Fed officials during the week.

 

Interesting Fact Thanksgiving fun fact

 

Turkey is the traditional dish for the Thanksgiving feast. In the US, about 280 million turkeys are sold for the Thanksgiving celebrations. There is no official reason or declaration for the use of turkey. They just happened to be the most plentiful meat available at the time of the first Thanksgiving in 1621, starting the tradition.

 

Source: http://www.coolest-holiday-parties.com/

For a PDF version of the below commentary click here weekly-letter-11-14-2016

Commentary quick take:

 

  • Major developments:
    • Trump pulled off a surprising upset on Tuesday
    • Markets jumped higher on Trump win
    • Odds of a rate hike have increased

 

  • Politics
    • Anti-establishmentarianism
    • Trump victory leaves many questions
    • Is a shakeup in Washington DC coming?
    • Polling data has been almost fully discredited

 

  • Earnings season:
    • 91 percent complete for S&P 500
    • Earnings season continues to be strong
    • Will upward revision be coming for the fourth quarter?

 

  • US Fed:
    • Chair Yellen’s days look numbered
    • December looks like a lock for a rate hike
    • Markets pricing in more than one hike in 2017

 

  • Technical market view:
    • Snap back rally on the back of the Trump win
    • VIX cratered after being significantly higher
    • Can the rally continue?

 

  • Hybrid investments strategy update:
    • No changes made—so far
    • Poor upside participation in the movements last week
    • “Safe haven” assets moved lower
    • Models were set up for a very different environment

 

  • This week for the markets:
    • Digesting election results and cabinet appointments
    • Foreign policies could come into play
    • Dollar movement

 

  • Interesting Facts: No Snow!

 

Major theme of the markets last week: At least we are past the election

pollsters-11-17-16

The markets were completely incorrect about the US election, both in terms of the projected outcome and the anticipated market reaction. Going into the election last Tuesday, the vast majority of the polls taken nationwide showed Hillary Clinton holding a lead, but the election results were anticipated to be very close. At the bottom of most of the poll data there is a little footnote that describes numerically the margin of error for the poll. In many cases, this margin of error was larger than the difference between the two front running candidates. Pollsters point to this when trying to describe why their results were incorrect, but most people don’t care about the footnote; they see the results and say the pollsters were wrong. Many in the financial media proclaimed doom and gloom should Trump win, while moderate gains were likely should Clinton win. This was not how things turned out.

US news impacting the financial markets:

funny-11-17-16

The focus of the national news last week was on the election. A good term started to circulate late last week to describe what happened—Anti-establishmentarianism. The vote last week seemed to be much more about people voting against the status quo and the establishment in Washington DC, even if that meant electing a billionaire with absolutely no experience in politics whatsoever. Polls were thrown out the window, much as they were during the Brexit vote, as Trump rode a wave of dissatisfaction all of the way to the finish line. We now find ourselves in a period of waiting and guessing at what could come of these historic results.

 

Election Day on Tuesday and into early Wednesday was a very wild ride for the financial markets. US markets were closed, but future markets were trading almost the entire time the ballots were being counted. As more and more states came in red and Trump pulled far ahead of Clinton, it was clear that the reality of President Trump was more likely than another President Clinton. At first the futures numbers for the Dow were relatively calm with the market only showing losses of about 200 points. Those losses accelerated as the night drew on, however, with total expected losses (as shown on the futures market) of -857 points just before 3:30 am eastern time. Then Trump gave his acceptance speech, a speech that had a very different tone than the verbose rhetoric we had seen on the campaign trail. With the drastic change in tone, the markets turned around, opening trading on Wednesday morning higher on all three of the major US indexes.  This upward movement was driven by a relatively small number of companies, as infrastructure and construction companies as well as financials, aerospace, defense and healthcare stocks pushed higher. The more “safe haven” assets moved lower as investors suddenly seemed willing to take on much higher levels of risk. One area of investments that was particularly hard hit was fixed income.

 

Fixed income investments had a very difficult week last week with more than $1 trillion dollars flowing out of the space over the course of the week. That is a significant part of the overall fixed income market when you consider that the overall fixed income market is just less than $50 trillion.  The long end of the yield curve was the hardest hit, while the shorter maturity bonds were least damaged, but still pushed lower. The reason for the drastic movement in fixed income last week was directly related to the expected spending that we could see under President Trump. Typically, government spending is inflationary for an economy and Trump seems poised to increase spending if it is within the ability of the President to do so—which it may not be. With the increased possibility of inflation in the US economy, the likelihood of a rate hike by the Fed increased, as can be seen in the table to the right. The table, however, does not show the whole story as it is the probability of just a single rate hike at each of the meetings listed. If you look at the Fed watch table for November of 2017, there is currently a 5 percent chance of 4 rate hikes between now and then. The reality that rates may increase much faster than thought prior to last week is the cause for the rout in bonds that occurred last week. We could conceivably see rising rates for the remainder of Chair Yellen’s term, which expires in early February 2018 when President Trump will likely not reappoint her to chair the Federal Reserve. While the markets were focused almost solely on the election last week, we started to be able to see the end of third quarter earnings season.

fed-watch-11-14-16

Last week was the start of the large slowdown in earnings that was expected for the third quarter of 2016. 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:

 

CVS Health 4% Jack Henry & Associates 13% SeaWorld Entertainment -27%
D.R. Horton -3% Kohls 19% Shake Shack 0%
Dean Foods 0% Liberty Media 220% SolarCity 3%
EchoStar 0% Macy’s -58% Sotheby’s -26%
Ferrari 22% Marriott 1% SunPower -16%
First Data 7% MGM Resorts 625% TASER 40%
Flowers Foods -5% Mylan -8% Walt Disney -4%
J C Penney 5% Ralph Lauren 12% Wendys 10%

 

As you can see in the table above, there was more red than green, as entertainment related companies posted poor results. Walt Disney and SeaWorld in particular both missed third quarter results with both experiencing slower than expected growth in foot traffic. MGM resorts and Liberty Media were the standout winners last week, but their numbers were not as good as they looked at first glance. Both companies were projected to have very small positive earnings and both turned in slightly better earnings, but nothing huge. Last week, large retailers started to report earnings and the results were mixed as high-end stores like Macy’s and Sotheby’s posted negative results, while lower end retailers such as Kohl’s and JP Penney turned in good results. We should receive many more retailers’ results over the coming two weeks and potentially a little glimpse into the upcoming holiday shopping season.

 

According to Factset Research, we have seen 455 (91 percent) of the S&P 500 companies release their results for the third quarter of 2016. Of the 455 that have released, 71 percent have beaten earnings expectations, while 7 percent have met and 21 percent have fallen short of expectations. When looking at revenue, of the companies that have reported, 55 percent of the companies have beaten estimates, while 45 percent have fallen short. Both the revenue figures as well as the earnings per share figures stayed relatively unchanged, when compared to the levels seen two weeks ago. The earnings figures above are within 1 percent of the 5-year average level, while the revenue figures are equal to the 5-year average level that we have seen on the S&P 500. The overall blended earnings growth rate that has been seen so far for the S&P 500 is 2.9 percent, which is much better than the anticipated -2.2 percent that was expected going into the quarter. With only 9 percent of the companies in the S&P 500 needing to report earnings, it is becoming increasingly unlikely that the above mentioned figures will change by a material amount between now and the end of the reporting season.

 

This week is part of the great slowdown in the number of companies reporting earnings as there are less than 600 companies reporting earnings, compared to the past few weeks, which have seen more than 1,500 companies reporting. The table of well-known companies below shows the companies that have the greatest potential to move the markets highlighted in green:

 

Abercrombie & Fitch Famous Dave’s of America Ross Stores
Agilent Technologies Foot Locker Salesforce.com
Best Buy Gap Staples
Buckle Gordmans Stores Stein Mart
Cisco Systems Home Depot Target
Dick’s Sporting Goods J M Smucker TJXmpanies
Diebold Lowe’s Wal Mart Stores

 

This week, retail companies will be in focus with the world’s largest retailer, Wal-Mart, seeing much of the individual company focus in the media. Home improvement stores Home Depot and Lowe’s also report earnings and provide a good read of how the average US consumer feels about the housing market in the US; people typically spend money on their homes when they think the housing market is good and pull back on home improvement spending if they think a housing market correction is imminent.

 

The next few weeks will likely focus on the ever changing situation in Washington DC as the great migration from one administration to another is now under way. A few key appointments have already been made, including President Trump’s Chief of Staff (perhaps the most important appointment), as RNC national Chairman Reince Priebus has been named. Policies have already begun to soften from the rhetoric on the campaign trail, with Obamacare now being tweaked rather than being repealed and replaced. The deportation threat on the campaign trail to millions of illegal immigrants has now come down to around 800,000 dangerous criminal illegal immigrants. Even the “wall” between the US and Mexico has gone from a lofty wall to a wall in some places and a fence in others. Reality has started to hit President-elect Trump and what he is seeing is that getting anything done in Washington DC is difficult. While some of his actions can be done with executive orders, big changes will require the support of Congress. While Republicans did manage to maintain control of both houses of Congress, there are many members of Congress who are Republicans that are unlikely to blindly follow President Trump’s every whim. Every incoming President has lofty goals for the first 100 days. In reality, most of these goals fall flat, much like many campaign trail promises.

 

Hybrid model performance and update

 

I moved this section up this week since I know performance is on the top of everyone’s mind here recently, especially with the wild market movements of the past two weeks. With the election surprise, the US financial markets jumped higher, but as mentioned above, the jump was not all inclusive. The hybrid models were largely defensively positioned going into Election Day as the outcome looked too close to call, even on Tuesday at the market close. Defensive positions in the models included inverse funds, preferred stocks, cash and dividend paying stocks. All of these traditionally defensive types of positions were hit and moved lower (with the exception of cash) in the aftermath of the election results. Even if someone had told me with absolute certainty the outcome of the election, I would never have guessed that the markets would have behaved as they did on Wednesday and Thursday. In the midst of a very large increase in the markets, it is typically best to sit on the sidelines as you are already late to the game if you were not already in at the start. This was the case for the hybrid models last week with the most conservative models actually being hit the hardest by the market movements.

For the trading week ending on 11/11/2016, returns in the hybrid hypothetical models* (net of a 1% annual management fee) were as follows:

 

Last Week 2016 YTD Since 6/30/2015
Aggressive Model 2.22% -0.75% 3.51%
Aggressive Benchmark 1.43% 2.37% -2.83%
Growth Model 1.27% -0.09% 3.24%
Growth Benchmark 1.11% 2.02% -1.95%
Moderate Model 0.29% 0.56% 3.30%
Moderate Benchmark 0.79% 1.59% -1.16%
Income Model -0.37% 0.87% 3.51%
Income Benchmark 0.40% 0.98% -0.32%
S&P 500 3.80% 5.90% 4.91%

*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.

 

As you can see in the numbers above, the movements were very US-centric as the overall MSCI All Cap World Index, which is a large component of each of the benchmark indexes, failed to keep pace with the US market movements as well. In light of the poor performance of the hybrid models, I am currently reevaluating my thinking of defensive positions and how they are utilized. When historical movements and correlations are tossed out the window, it is best to look at the world we find ourselves in and see if any changes are needed. I do not think the market will continue to rally as strongly as it did last week, but that does not mean that the risk dynamic of investments overall did not change. I will keep everyone updated of any significant shifts in strategy, but for the time being, waiting to see if the recent movements are sustainable seems to be the most prudent course of action.

 

Global news impacting the markets:

 

There was very little in the global financial news last week that did not pertain to the US election and the potential impact the results could have with many different countries around the world. Mexico in particular was hit very hard last week, both in its financial markets and currency, as one thing about the US election seems to be staying: Trump’s distain for Mexico. NAFTA will likely be renegotiated under President Trump so that the US gets a better deal and this will likely come at the expense of Mexico. The Trans Pacific Partnership (TPP) is also at risk, but changing it seems like it will take much more time than NAFTA. When dealing with Asia (China and Japan in particular), the US has to be very careful because while we buy a lot of goods from countries throughout Asia, they in turn buy a whole lot of our debt. It is difficult to go into a bank, ask for a loan and get a rate, then punch the banker in the face and ask for a better rate. Chances are you would get tossed out of the bank and likely be arrested rather than get a better deal. This is the same type of situation the US finds itself in with our Asian creditors. Things do not get better for the US if Trump follows through with his Department of the Treasury labeling China a currencies manipulator shortly after his taking office.

 

Technical market review:

 

What a difference a Presidential election week can have on technical analysis charts. All three of the major US indexes turned in positive gains last week, with two moving back into their respective trading ranges, while one shot right through it. The blue lines represent the closest level of support/ resistance for each of the indexes, established by points the markets have touched in the past prior to bouncing higher. The red lines represent the upper edge of the most recent trading range on each of the three major indexes. For the VIX, the red line remains the rolling 52-week average level of the VIX.

4-charts-combined-11-14-16

As you can see in the above charts, the Dow (upper right pane above) is clearly the strong index in terms of technical strength as it moved from below its most recent trading range, into the range and then sharply above the range all in just three days’ time. Both of the other two indexes, the S&P 500 (upper left pane above) and NASDAQ (lower left pane above), managed to break back into their respective trading ranges, but ended the week near the middle of the trading range. The VIX tumbled last week by nearly 40 percent, giving up almost as much as it gained two weeks ago as investors favored risky assets over the more defensive investments. The movement in the markets last week is known as a knee-jerk reaction. Typically, the movement is short lived and quickly moves in the opposite direction. There is no reason to think this move last week will be any different.

 

Market Statistics:

 

The US markets jumped higher last week after the surprise Trump victory on the hope that he will be able to grow the economy:

 

Index Change Volume
Dow 5.36% Way Above Average
S&P 500 3.80% Way Above Average
NASDAQ 3.78% Way Above Average

 

Volume, as could be expected given the magnitude of the political event last week, was way above average as investors jumped to try to get into sectors of the market that could benefit the most from a President Trump or sectors that had been artificially pushed lower by the prospects of a President Clinton. Currently, the moves in the markets look overdone and a correction looks likely from current levels.

 

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

 

Top 5 Sectors Change Bottom 5 Sectors Change
Biotechnology 14.42% Infrastructure -3.37%
Regional Banks 13.45% International Real Estate -3.51%
Broker Dealers 12.51% Utilities -4.63%
Pharmaceuticals 12.18% Silver -5.67%
Financial Services 11.22% Gold -5.81%

 

Biotechnology, Pharmaceuticals and financials all led the way higher, but for different reasons. Biotechnology and Pharmaceuticals pushed higher last week because the Hillary “put” was taken off. A “put” in investment terms is a contract to sell something at a specific price. When talking about a sector, it means there was a lot of selling pressure on a specific group of stocks. This was the case for Biotechnology and Pharmaceuticals as both had become favored sectors for Hillary Clinton to bash on the campaign trail for taking advantage of people. With Clinton out, pressure was immediately lifted in a big way. Financials also jumped higher last week, but mainly from the thought that regulation would be less and diminished by a Trump Presidency, which is already calling for walking back Dodd-Frank and other key pieces of financial industry regulations under the Obama administration. Safety stocks turned in the opposite performance last week as Gold, Silver, Utilities and Real Estate all made up four of the bottom five performing sectors of the markets. These were casualties of the risk-on trade from last week. The final sector of the underperforming sectors was curious to me as it was global Infrastructure. With Trump going on a supposed spending spree on infrastructure, I thought this sector would have been one of the top performers. In reality, infrastructure spending here in the US makes up such a small part of global infrastructure spending that the sector as a whole still saw negative performance, despite the bump from infrastructure companies here in the US.

 

With the prospects of higher rates sooner than anticipated, fixed income last week had a very difficult week here in the US:

 

Fixed Income Change
Long (20+ years) -7.36%
Middle (7-10 years) -3.07%
Short (less than 1 year) -0.07%
TIPS -1.42%

Global currency trading volume was above average last week, thanks to large money managers adjusting positions in the Mexican Peso as a result of the US election. Overall, the US dollar advanced 2.11 percent against a basket of international currencies. The best performing of the global currencies last week was the British Pound, as it gained 0.59 percent against the US dollar. The worst performance among the global currencies was seen in the Mexican Peso, as it declined by 9.13 percent against the value of the US dollar. As mentioned above, the decline in the Peso was due to threats from Trump while on the campaign trail of mass deportations and the building of the wall between Mexico and the US to keep illegal immigrants from crossing.

Commodities were mixed last week as Copper jumped higher, while most of the other commodities pushed lower.

Metals Change Commodities Change
Gold -5.86% Oil -2.10%
Silver -5.67% Livestock 2.49%
Copper 12.07% Grains -1.46%
Agriculture -1.18%

The overall Goldman Sachs Commodity Index declined 1.42 percent last week, thanks in large part to the continued slide in the price of oil. Oil declined by 2.10 percent and has now declined by almost 18 percent since the middle of October, when questions about a potential OPEC production cut/freeze started to arise. Gold and Silver both had a very difficult week, giving up more than five and a half percent, while Copper bucked the trend in a big way, gaining 12 percent, thanks to its industrial uses. Soft commodities were mixed with Agriculture overall falling 1.18 percent, while Livestock gained 2.49 percent and Grains slid 1.46 percent.

Top 2 Indexes Country Change Bottom 2 Indexes Country Change
Caracas General Venezuela 44.9% Sao Paulo Bovespa Brazil -3.9%
CASE 30 Egypt 21.3% Merval Argentina -6.5%

Last week was mostly a positive week for the global financial markets with 69 percent of the markets turning in positive performance for the week. The best performing index last week was found in Venezuela and was the Caracas General index, which turned in an eye-opening 44.9 percent gain for the week. The situation in Venezuela is very curious as you have a government that is very weak and likely to be tossed out, as well as hyperinflation and food shortages. One theory as to why the stock index has been performing so well is the fact that there really isn’t anything else to purchase to try to keep up with inflation, so people who can are buying stocks. It also helps that the stock index in Venezuela is made up of only 11 companies, so it is not too hard to buy ones that are likely pushing higher. This really is a house of cards, however, as the air could come out of the trade just as fast, if not faster, than it has gone up. The worst performing index for the week was found in Argentina and was the Merval Index, which turned in a loss of 6.23 percent. Much of the decline in the index was due to the continued fall in commodities prices seen around the world last week.

“What goes up must come down” is a common saying that held true last week for the VIX. After gaining almost 40 percent two weeks ago, the VIX came back down to earth last week, giving up almost 40 percent over the course of the week. The risk seems to have been taken out of the market now that the uncertainty surrounding the US election is past us—at least if you look at the VIX— but it seems the VIX has moved down a little too fast. The current reading of 14.17 implies that a move of 4.09 percent is likely to occur over the next 30 days. The direction of the move over the next 30 days is unknown. With the election behind us, the VIX will start to price in expectations for the upcoming holiday season, which is less than two months away, but it looks like the VIX will remain relatively low for the time being.

Economic Release Calendar:

 

Even the economic news releases were slowed down by the election as there were only two releases on the calendar last week:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Neutral 11/7/2016 Consumer Credit September 2016 $19.3B $17.5B
Slightly Positive 11/11/2016 University of Michigan Consumer Sentiment Index November 2016 91.60 87.90

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

 

Last week the economic news releases started on Monday with the release of the consumer credit report for the month of September, which came in slightly higher than expected as credit expanded by $19.3 billion during the month. This type of gain is just the middle-of-the-road in terms of historical month figures, so it was largely ignored by the markets. Last week the economic news releases for the week wrapped up on Friday with the release of the University of Michigan’s Consumer sentiment index for the month of November, which came in slightly above expectations as Americans seemed to be thinking past the election and on to the Holiday shopping season. There was one Fed official that spoke last week that the market took notice of and that was Vice-Chair Stanley Fisher, who spoke on Friday and made it seem like a December rate hike at this point was very much in the cards and that the Fed may have to reevaluate its expectations for inflation going forward under this unexpected Presidency.

 

With October and the election behind us, there is some key October economic data being released this week as well as a first look at data for the month of November:

 

Date Release Release Range Market Expectation
11/15/2016 Retail Sales October 2016 0.60%
11/15/2016 Retail Sales ex-auto October 2016 0.50%
11/15/2016 Empire Manufacturing November 2016 -0.5
11/16/2016 PPI October 2016 0.30%
11/16/2016 Core PPI October 2016 0.20%
11/17/2016 CPI October 2016 0.40%
11/17/2016 Core CPI October 2016 0.20%
11/17/2016 Housing Starts October 2016 1178K
11/17/2016 Building Permits October 2016 1200K
11/17/2016 Philadelphia Fed November 2016 7

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

 

This week the economic news releases start on Tuesday with the release of retail sales for October and the Empire manufacturing figure for the month of November. Retail sales for October are expected to post modest gains of about half of a percent when compared to September figures. While this is a steady improvement, if it comes to fruition it is still very slow growth compared to what we have seen at this stage in past economic cycles. The Empire Manufacturing index released on Tuesday could have adverse impacts on the market if it posts yet another consecutive decline for the month of November. The last reading was -6.8 and the market had been expecting a positive 2.5, so with such a large miss last time almost anything is possible this time around. On Wednesday, the Producer Price Index (PPI) for the month of October is set to be released with expectations of very low levels of inflation being seen. This should not impact the markets if the expected figures turn out to be correct. On Thursday, the Consumer Price Index (CPI) for October is set to be released and, much like the PPI, it is not expected to show much of an increase. Housing starts and building permits will be released later during the day on Thursday and will provide the first look at the US housing market for the month of October. Wrapping up the week on Thursday is the release of the Philadelphia Fed index for the month of November, which, unlike the Empire Index earlier in the week, is expected to post a small, but positive, figure, indicating growth in manufacturing in the greater Philly area during the month. In addition to the scheduled economic news releases, there are 14 speeches being given by Fed officials, including testimony by Chair Yellen. We will have to wait and see if she comments on the election results or not as she was commonly thought to be Hillary leaning.

 

Interesting Fact No Snow Yet

 

Colorado has seen very little snow so far this year with some of the ski resorts starting to get worried about a lack of snow for the Thanksgiving holiday, which is typically a good early skiing time of year. I pulled the snow fall data going back to 1881 for the Denver area and found that 20 percent of the years Denver saw no snow fall between July and October, meaning the dry weather we have seen so far is not unusual. However, if we make it through the month of November without any measurable slow fall in Denver, that would be a first in the 135 years of data that was analyzed.

 

Source: NOAA table

For a PDF version of the below commentary please click here weekly-letter-11-7-2016

Commentary quick take:

 

  • Major developments:
    • Only 1 more day to go until Election Day!
    • Markets pushed lower all week last week
    • No change from the Fed’s November meeting

 

  • Politics
    • US markets focused on politics last week
    • Race tightened in several battle ground states
    • One more day, but it could drag out

 

  • Earnings season:
    • 85 percent complete for S&P 500
    • Earnings season continues to be strong
    • Two major energy companies turned in strong results

 

  • US Fed:
    • No hike at November meeting
    • Statement language made a December hike seem very likely
    • Employment market showed mixed signals

 

  • Technical market view:
    • Breakdown continued last week
    • VIX spiked upward
    • Last week ended with the S&P in one of its longest losing streaks

 

  • Hybrid investments strategy update:
    • Several changes made
    • Lowered overall risk across the models
    • Will adjust positioning after election uncertainty has passed

 

  • This week for the markets:
    • Election results
    • Sector movement as a result of election
    • Continued Brexit uncertainty

 

  • Interesting Facts: George Washington and the election

 

Major theme of the markets last week: Politics!

funny-11-7-16

Last week the US and global financial markets seemed to be solely focused on the upcoming US election. With this focus, some investors missed the fact that we saw a major losing streak extend to nine full days for the three main US indexes (the longest losing streak for the S&P 500 going back to 1920 was 12 days). It seems volatility has returned to the markets as there is little certainty over what will happen come Election Day and the days following if the vote is very close.

US news impacting the financial markets:

 

Is everyone tired of politics yet? If you are, you are certainly not alone. It seems everywhere you turn there are political signs and messages, especially if you are lucky enough to live in one of the “battle ground” states. At least we only have one more day until Election Day. Then hopefully it will be behind us and the financial markets around the world can return to focusing on financial issues and opportunities. Currently, the polling data is mixed with Clinton leading in some polls nationwide, while Trump is ahead by a little in others. After how poorly polling data worked on the Brexit vote earlier this year, everyone seems to be skeptical about the numbers being tossed around by the media. For the most part it looks like we will move into Election Day with most races being within the margin of error for the polls, which means it could turn out to be a very tight election.

 

With the announcement of the FBI finding nothing criminal in its latest mini-investigation into Hillary Clinton’s emails, it was not surprising to see the US market jump higher on Monday. It is commonly thought that Trump would be negative for the financial markets because of the amount of uncertainty he would bring to the White House. Hillary could be positive for the markets as her policies are likely be similar to the actions taken over the last eight years. In general terms, it is difficult for a single person, even the President, to move the needle on the overall economy. It has been done in the past, but only under very unique circumstances. In general, a more important person to the financial markets is the Chair of the US Federal Reserve, as that person controls much more powerful levers that directly impact the overall US economy.

 

The November meeting of the FOMC was held last week and, as expected, the Fed funds rate was held at the level it has been all year. While the data looked like it could be strong enough to warrant a move upward in rates, the committee did not want to appear political this close to an election. While Chair Yellen stated the decision was not based on political reasons and the Fed is not politically based, this was pretty clearly a politically motivated decision.  The wording of the overall statement from the meeting changed very little from the September meeting, but there were a few individual words changed. In the following sentence, for instance, the word “some” was added: “The committee judges that the case for an increase in the federal funds rate has continued to strengthen but decided, for the time being, to wait for some further evidence of continued progress toward its objectives.” Without outlining specific items that the FOMC would like to see improvements in before raising rates, it is assumed that rates will be moving higher at the December meeting. This is seen in the chart to the right, which shows the odds of a rate hike at each of the next four FOMC meetings. At this point it would take some unseen event or change in the economic data for the Fed to put a rate hike on hold at the December meeting. If this occurs, the Fed will have not raised rates at all in 2016. After we see a hike, questions will arise pertaining to the timing of the next hike and positioning of the goal posts for the data the Fed has been watching.

fed-watch-11-7-16

Last week was the second busiest week for earnings that we will see for the third quarter of 2016 with more than 1,400 companies releasing their results. Below is a table of the well-known companies that released earnings last week with earnings that missed expectations highlighted in red, while earnings that beat expectations by more than 10 percent are highlighted in green:

 

3D Systems 0% Coach 2% Office Depot 7%
Activision Blizzard 18% Cummins 5% Owens & Minor 0%
AIG -17% Dennys 0% Papa John’s 14%
Allstate 2% Estee Lauder 6% Papa Murphy’s -160%
AmerisourceBergen 7% Facebook 14% Prudential Financial 6%
Anthem -2% Hain Celestial Pushed Scotts Miracle-Gro -15%
Aqua America 5% Hyatt Hotels 68% SolarCity Pushed
Avis Budget 6% J & J Snack Foods -10% Starbucks 2%
Big 5 Sporting Goods 37% Kate Spade 63% Time 0%
Brookdale Senior Living -18% Kellogg 10% Time Warner 35%
Carbonite 400% Manitowoc -8% Transocean 79%
Cardinal Health 2% Molson Coors Brewing 2% United States Steel -55%
CenturyLink 2% Mylan Pushed Western Union 0%
Church & Dwight 0% Noble Energy 68% Whole Foods Market 17%
Clorox -4% Noodles & Co -33% Zillow 250%

 

Last week there were very few earnings reports that surprised investors more than the very strong performance seen by both Transocean and Noble Energy. Both companies are in the Oil and Gas sector and had been hit very hard over the past several quarters. During the third quarter, however, each of the companies seemed to turn a corner in terms of the price declines in oil negatively impacting their businesses as each company reported upside surprises in earnings of greater than 65 percent. The majority of the other earnings announcements last week showed mixed results with the majority of the very large companies turning in results that were very close to expectations.

 

According to Factset Research, we have seen 428 (85 percent) of the S&P 500 companies release their results for the third quarter of 2016. Of the 428 that have released, 71 percent have beaten earnings expectations, while 7 percent have met and 21 percent have fallen short of expectations. When looking at revenue, of the companies that have reported, 54 percent of the companies have beaten estimates, while 46 percent have fallen short. Both the revenue figures as well as the earnings per share figures declined over the course of the previous week, when compared to the levels seen two weeks ago. The earnings figures above are within 1 percent of the 5-year average level, while the revenue figures are equal to the 5-year average level that we have seen on the S&P 500. While we can now see the finish line in front of us for the third quarter earnings season, 15 percent of the S&P 500 companies have yet to report. This 15 percent could still push the overall earnings and revenues numbers for the quarter around a little, but it is unlikely to see the quarter close out materially different than the numbers reported above. If we do close out the quarter with the current numbers, the reporting season would be seen as a success; going into the quarter, expectations had been for a negative growth rate (-2.2 percent) and as it stands currently, the S&P 500 is running an earnings growth rate of 2.6 percent.

 

This week is where we start to see the sharp decline in the number of companies reporting earnings. Of the companies reporting, there are fewer companies that could materially impact the overall markets when they make their announcement. The table below of well-known companies shows the companies that have the greatest potential to move the markets highlighted in green:

 

CVS Health Jack Henry & Associates SeaWorld Entertainment
D.R. Horton Kohls Shake Shack
Dean Foods Liberty Media SolarCity
EchoStar Macy’s Sotheby’s
Ferrari Marriott SunPower
First Data MGM Resorts TASER
Flowers Foods Mylan Walt Disney
J C Penney Ralph Lauren Wendy’s

 

Consumer focused retail companies make up about half of the earnings reports that are expected this week. With the results that we have seen from consumer spending, we will probably see a very mixed bag of results. Higher end retailers seem to be doing well, while the lower end and discount retailers seem to be having a difficult time in the recent economic recovery.

 

Global news impacting the markets:

 

The big story out of the global media last week that seemed to impact the financial markets was out of the UK as the high court ruled last week that invoking article 50 with the EU was something that only Parliament had the power to do. This is a major blow to the pro-Brexit community in the UK and to PM Theresa May as it looks unlikely that Parliament would vote for the Brexit as it currently stands. The ruling by the court brings many questions about who can legally call for Article 50 to be invoked. The EU, it seems, would take the PM’s nod to move forward and would not wait for Parliament to back the move. PM May has said that the UK is still on track for a March start to Article 50, which starts a two-year negotiation window for the UK to leave the EU. On the announcement of the ruling, the British pound rallied and the risk associated with investing in the broad UK indexes declined. The other story last week in the international media that impacted the financial markets was the continued infighting within OPEC about oil production cuts and freezes.

 

As you can see in the chart to the right, oil has been on a steady decline since the last two weeks of October, when speculation that OPEC could not come up with a deal to curb production started in earnest. This speculation differs from what is being heard from OPEC itself, as just yesterday OPEC Secretary-General Mohammed Barkindo reiterated OPEC’s commitment to the deal made in Algiers late September to cut output. While the prospects of the price of oil falling back under $30 per barrel seems very slim, so too do the prospects of oil making a run at $60 per barrel any time soon. With oil prices essentially range bound in a $10 range, it is possible for many of the US drillers to operate efficiently and still turn a profit. It remains to be seen, however, what other countries such as Russia, Venezuela, and Iran do as they all need prices significantly above current levels to run their economies, which are so heavily dependent on oil exports.

oil-11-7-16


Technical market review:

 

The three main financial indexes continued to decline last week as uncertainty over the upcoming election seemed to be driving investors away from the markets.  There were no changes this week to the time frame represented on the charts below. The blue lines represent the closest level of support/ resistance for each of the indexes, established by points the markets have touched in the past prior to bouncing higher. The red lines represent the upper edge of the most recent trading range on each of the three major indexes. For the VIX, the red line remains the rolling 52-week average level of the VIX.

4-charts-combined-11-7-16

Technically, all three of the major US indexes continued to break down last week, but the breakdown on the NASDAQ (lower left pane above) was noticeably worse than the downward movement of the other two indexes. Going into last week, the NASDAQ was the sole index that managed to remain in its trading range, but in breaking down with a vengeance last week, the index now finds itself in roughly the same technical spot as the other two indexes. One index that did jump higher last week was the VIX, which saw a pop of almost 40 percent over election fears. The last time we saw the VIX jump as much as it did last week was just before the Brexit vote in the UK, which the markets ultimately called incorrectly and jumped higher afterwards. Back to the equity indexes, last week was an unusual week as all three of the major indexes posted their ninth straight day of declines on Friday. Rarely do all three of the major indexes go on such long stretches of moving in the same direction. Peter Wells from Bloomberg looked at the data going back to the 1920s on the S&P 500 and produced a list of the longest consecutive declines of the S&P 500. The table to the right shows all of the declines, excluding the current one. An interesting point to note in the table is the size of the declines that were experienced. So far over the past nine days, the S&P 500 has only declined 3.07 percent, making it one of the tamest declines seen over the nine day slide. When looking at what has occurred after such lengthy declines, the data is mixed. There are instances where a strong uptrend forms off the bottom and instances where there is a momentary bounce upward for a day or two, only to have the index resume its downward turn shortly after. Such was the case in 1966. This time around, it seems like much of the decline is due to political uncertainty. Once we are in the clear from politics, we could see the markets normalize once again.

longest-sp-500-streaks-11-7-16

Market Statistics:

 

The US markets moved lower last week with all three of the indexes loosing 1.5 percent or more during the week:

 

Index Change Volume
Dow -1.50% Below Average
S&P 500 -1.94% Average
NASDAQ -2.77% Average

 

While the declines were meaningful, the movements were done on just average or below average volume, which means there was no sense of panic in the markets. When investors panic about the movements of the markets, we typically see a spike in volume to something that is way above the one-year average level of volume. At this point on the three major indexes, it seems likely that we will see a low volume bounce given the length of the decline that we have seen in the markets through Friday.

 

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

 

Top 5 Sectors Change   Bottom 5 Sectors Change
Multimedia Networking 1.38%   Energy -2.63%
Transportation 0.93%   Oil & Gas Exploration -3.17%
Global Real Estate 0.00%   Biotechnology -3.37%
Basic Materials -0.44%   Pharmaceuticals -4.51%
Home Construction -0.51%   Telecommunications -6.02%

 

The Multimedia Networking sector took top honors last week, thanks in large part to earnings results in the highly concentrated sector driving the positive performance. Transportation also turned in positive results, thanks to the declining prices of fuel. The remaining three sectors on the top five performing sectors list got to their positions for a variety of seemingly random reasons. The bottom performing sectors last week should come as no surprise to most investors as two of the five were directly related to the falling price of oil and two of the other sectors, Biotechnology and Pharmaceuticals, are still under political pressure. Telecommunications is another very concentrated sector of the markets and when two of the major companies in the sector experience declines of more than 20 percent during a week, it is not surprising to see that the sector as a whole suffers. That is what happened last week as Century Link declined 24 percent after announcing a buyout of Level 3 Communications and Frontier Communications declined by more than 20 percent after it announced difficult business conditions, leading it to lay off a large number of employees in the coming months.

 

With no change in rates from the Fed last week and the equity markets moving lower, it was not surprising to see that fixed income investments has a relatively good week:

 

Fixed Income Change
Long (20+ years) 1.18%
Middle (7-10 years) 0.63%
Short (less than 1 year) 0.03%
TIPS 0.22%

Global currency trading volume was above average last week, thanks to large money managers adjusting positions in the British Pound after the Brexit court ruling. Overall, the US dollar declined 1.38 percent against a basket of international currencies. The best performing of the global currencies last week was the British Pound, as it gained 2.73 percent against the US dollar. The worst performance among the global currencies was seen in the Egyptian Pound, as it declined by 42.81 percent against the value of the US dollar (that is not a typo). The economy in Egypt has been in shambles for the past several years after the government was essentially overthrown and the Muslim Brotherhood swept into short-lived power. The military took over the country from the Muslim Brotherhood less than 18 months ago and ever since the black market for currencies within the country has been large. The negative adjustment last week on the Egyptian Pound was an effort by the government to reconcile the difference between the official currency rate and the rate on the black markets. It did this so it could be eligible for $12 billion in loans from the IMF, which were approved after Egypt allowed its currency to move closer to market rates.

Commodities were mixed last week as Oil moved lower, while all of the metals moved higher:

Metals Change   Commodities Change
Gold 2.31%   Oil -9.36%
Silver 3.50%   Livestock -2.22%
Copper 3.21%   Grains -1.85%
      Agriculture -1.02%

The overall Goldman Sachs Commodity Index declined 5.68 percent last week, thanks in large part to the index being production weighted and Oil being the most heavily weighted commodity in the index. Oil declined by 9.36 percent, as mentioned above, in large part due to a lack of any concrete information about the discussed production freeze/cut by OPEC. Oil has now fallen more than 15 percent since the highs seen back in the middle of October. All metals were positive last week with Gold, Silver and Copper all turning in gains in excess of 2 percent for the week as investors seemed to be moving toward the perceived safety of the hard assets. Soft commodities followed stocks lower last week with Agriculture overall falling 1.02 percent, while Livestock declined 2.22 percent and Grains slid 1.85 percent.

Top 2 Indexes Country Change   Bottom 2 Indexes Country Change
Caracas General Venezuela 14.00%   FTSE MIB Italy -5.80%
CASE 30 Egypt 5.60%   Merval Argentina -6.23%

Last week was mostly a negative week for the global financial markets with only 12 percent of the markets turning in positive performance for the week. The best performing index last week was found in Venezuela and was the Caracas General index, which turned in a 14 percent gain for the week. The gain in Venezuela was due to court rulings in favor of an election being called for, in which current President Maduro is unlikely to be able to remain in power. The worst performing index for the week was found in Argentina and was the Merval Index, which turned in a loss of 6.23 percent. Much of the decline in the index was due to the falling commodities prices seen around the world last week.

The VIX was on a political tear last week, gaining almost 40 percent over the course of the week as uncertainty over the outcome of the US election seemed to breed fear in the markets. After going more than a month with no weekly gains in the VIX of more than 20 percent, we have now seen two consecutive weeks of gains greater than 20 percent. The current reading of 22.51 implies that a move of 6.50 percent is likely to occur over the next 30 days. The direction of the move over the next 30 days is unknown. We are now very close to the election here in the US and it would not be surprising see the VIX continue to move around wildly over the lead up to the election and potentially after the election if there are accusations of problems with voting.

For the trading week ending on 11/4/2016, returns in the hybrid hypothetical models* (net of a 1% annual management fee) were as follows:

  Last Week 2016 YTD Since 6/30/2015
Aggressive Model -1.40% -2.93% 1.22%
Aggressive Benchmark -1.72% 0.93% -4.20%
Growth Model -1.08% -1.37% 1.91%
Growth Benchmark -1.34% 0.90% -3.02%
Moderate Model -0.69% 0.26% 2.99%
Moderate Benchmark -0.95% 0.80% -1.93%
Income Model -0.48% 1.23% 3.88%
Income Benchmark -0.47% 0.58% -0.72%
S&P 500 -1.94% 2.02% 1.07%

*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 several changes made last week in the hybrid models, all being made to lower overall risk and exposure to the markets. The first set of changes was to sell the partial positions in both small and mid-caps indexes. The funds sold were Rydex Small Cap Fund (ticker RYRHX) and Rydex Mid Cap Value (ticker RYAVX). Both of these funds hit trigger points indicating that there was continued downside risk that was greater than their upside potential. The other move last week was to initiate a hedging (inverse) position on the Dow in a small amount in each of the models. Inverse positions are utilized from time to time to take risk out of downward movements in the individual stocks owned within the models. The purpose of the position is to go up when the Dow declines and to decline when the Dow increases. There was already an inverse position in place on the S&P 500, but since the correlations of the stocks have been a little higher toward the Dow in the recent downtrend of the markets, I added the inverse position on the Dow. At this point I do not foresee any more changes in the models until after the election dust has settled. The overall risk in the models is roughly half or less than that of the markets, given the unknown and potentially very unnerving election results. Playing it safe currently seems like the most prudent course of action. Once through the election, the models can be adjusted very quickly if opportunities present themselves, opportunities with a favorable risk and reward potential.

 

Economic Release Calendar:

 

Last week was an average week for economic news releases in terms of the number of releases with only one release being significantly different than expectations:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Neutral 10/31/2016 Personal Income September 2016 0.30% 0.40%
Neutral 10/31/2016 Personal Spending September 2016 0.50% 0.50%
Neutral 10/31/2016 Core PCE Price Index September 2016 0.10% 0.10%
Negative 10/31/2016 Chicago PMI October 2016 50.6 54.0
Neutral 11/1/2016 ISM Index October 2016 51.9 51.7
Slightly Negative 11/2/2016 ADP Employment Change October 2016 147K 165K
Neutral 11/2/2016 FOMC Rate Decision November 2016 No Change No Change
Neutral 11/3/2016 ISM Services October 2016 54.8 55.8
Slightly Negative 11/4/2016 Nonfarm Payrolls October 2016 161K 175K
Slightly Negative 11/4/2016 Nonfarm Private Payrolls October 2016 142K 170K
Neutral 11/4/2016 Unemployment Rate October 2016 4.9% 4.9%

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

 

Last week the economic news releases started on Monday with personal income and spending as well as the Core PCE price index for the month of September, which all came in very close to market expectations. The core PCE data, while very low, did not put up a yellow light in terms of the Fed potentially moving on rates at the December meeting. The negative news of the day on Monday was found in the Chicago area PMI for the month of October, which came in at 50.6, just slightly in expansionary mode. This number was low enough that it shows that manufacturing in the US is currently running slower than many economists and the Fed would like to see in a healthy economy. The ISM index for the month of October was released on Tuesday and came in at a 51.9 reading, which is nicely above the inflection point of 50.0, but still indicating that there is a lot of room for improvement in the manufacturing sector of the economy. On Wednesday, the first of the employment related releases for the week was released, with the ADP employment change index showing a gain of 147,000 jobs during the month of October, slightly less than had been expected, but not enough of a difference for the market to adjust expectations for the end of the week employment figures. The big story of the day for the markets on Wednesday was the release of the FOMC rate decision and policy statement, discussed above. On Thursday the Services side of the ISM was released and came in close to market expectations and was thus largely ignored by the markets. On Friday the government released the latest round of information about the employment situation here in the US. Overall unemployment ticked down from 5 percent to 4.9 percent, while the labor force participation rate also ticked down by one tenth of a percent. The payroll figures left a lot of room for improvement as both private and public payroll figures missed expectations by more than 12,000. Wage growth was shown to be positive and the strongest we have seen in more than a year, but overall, when taken in aggregate, the data released about employment on Friday painted a good, but not strong picture for the overall US economy.

 

With this being election week and with plenty of other things for the markets to be paying attention to, it is probably the slowest week of the year for economic news releases:

 

Date Release Release Range Market Expectation
11/7/2016 Consumer Credit September 2016 $17.5B
11/11/2016 University of Michigan Consumer Sentiment Index November 2016 87.9

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

 

On Monday, the latest consumer credit report will be released by the government with expectations that during September consumer credit will have expanded by about $17.5 billion. The only other release this week on the economic calendar is the first estimate of consumer sentiment according to the University of Michigan. Expectations are for little change when compared to the end of October. In addition to these two releases, there are six speeches being given by Fed officials this week, with the market watching to see if they provide any further information into the thinking at the Federal Reserve about a December rate hike.

 

Interesting Fact George Washington Election Facts:

 

George Washington is the only U.S. president in history to win 100% of the Electoral College vote. This is mainly because organized parties weren’t yet formed and he ran unopposed

 

George Washington blew his entire campaign budget on 160 gallons of liquor to serve to potential voters.

 

George Washington gave the shortest inauguration speech at 135 words. William Henry Harrison’s was the longest, at 8,445 words. He spoke for over two hours in a heavy snowstorm, which made him catch a cold and ultimately die from pneumonia one month later.

 

Source http://www.factretriever.com/us-presidential-elections-facts

For a PDF version of the below commentary please click here weekly-letter-10-31-2016

Commentary quick take:

 

  • Happy Halloween!

 

  • Major developments:
    • Passed the halfway mark for 3rd quarter earnings
    • Strong GDP growth in US and UK
    • Fed meeting this week

 

  • Earnings season:
    • Much better than expected
    • Tesla handedly beat expectations
    • Amazon delivered a poor quarter of results
    • Twitter and LinkedIn turned in strong performance

 

  • US Fed:
    • Likelihood of a rate hike at this week’s meeting near zero
    • Likelihood of a rate hike at the December meeting keeps increasing
    • GDP came in better than expected
    • Waiting on the labor data released this week

 

  • Technical market view:
    • Breakdown continued last week
    • VIX spiked upward
    • VIX gave back its gain from two weeks ago

 

  • Hybrid investments strategy update:
    • No changes to the models last week
    • Earnings season is pushing stocks around
    • Several earnings announcements this coming week

 

  • This week for the markets:
    • Earnings season continues
    • Fed November meeting
    • Potential November surprise for the election

 

  • Interesting Fact: NFL football viewership is down

 

Major theme of the markets last week: Politics and the financial markets

funny-10-31-16

With less than two weeks to go until Election Day here in the US, volatility in the financial markets seems to be picking up. The election has not just been affecting the financial markets, it has affected NFL game viewership and is pushing around foreign currencies. Fear (as seen on the VIX) jumped higher on Friday after it was announced that the FBI had reopened the e-mail investigation; an announcement that riled up Democrats as it was seen as a gift to Donald Trump. At least we are only eight days away from the election, after which we will all hear about how the losing side should have won, no matter which side actually wins.

US news impacting the financial markets:

 

Last week the financial media focused on earnings season, the Presidential race and the upcoming Fed meetings. As we are now inside of two weeks until voting day here in the US, it was not surprising to see that the markets really took notice of developments in the race last week. Early during the week the polls coming out showed Hillary Clinton with a clear lead in many of the battle ground states. After the announcement of the investigation of Clinton’s e-mails on Friday, the polls have been coming in much closer. The announcement took the financial markets and many Americans completely by surprise. This was seen by the sharp selloff in the broad indexes immediately following the announcement. The reaction was also seen in some of the global currencies such as the Mexican Peso, which tumbled on Friday afternoon thanks to fears that Trump as President could be bad for Mexico’s economy. With the announcement being made public and Democratic members of Congress crying foul on the timing of the announcement, we could be in for a very interesting week and a half leading up to election day. Many voters are wondering what the FBI could turn up on Anthony Weiner’s laptop, which was also used by his wife Huma Abedin, who at the time was a special aid and Vice-Chairwoman to Hillary Clinton.

 

With the FBI already being called out as interfering with the political process, it was not surprising to see that the odds of a rate hike at the Fed’s November meeting, which takes place this week, declined from an already low 9 percent going into last week down to 6 percent currently, illustrated in the table to the right. The November meeting over the course of the previous week was the only meeting that saw the odds of a rate hike decline; each of the following three meetings saw the odds increase. So far in 2016, we have not seen such high odds of a rate hike sustained. Having the odds of a rate hike for the December meeting at 73 percent indicates that the market is pretty sure we will see a hike in December. However, some of the economic data that will likely weigh on the Fed’s thinking about the December meeting has yet to be released, such as the employment data that comes out this Friday. One piece of key information that pushed the odds of a December hike up was the third quarter GDP figure released last week that came in showing better than expected growth during the quarter. While speculation about the Fed and the Presidential race continues, the markets will likely focus on earnings season as we are just past the halfway mark looking at the data through last Friday.

fed-watch-10-31-16

Last week was the busiest week for earnings that we will see for the third quarter of 2016 with more than 1,500 companies releasing their results. Below is a table of the well-known companies that released earnings last week with earnings that missed expectations highlighted in red, while earnings that beat expectations by more than 10 percent are highlighted in green:

 

Aetna 2% Dr Pepper Snapple 5% Public Storage 0%
Alphabet 9% Exxon Mobil 5% Raytheon 9%
Altria Group 1% Ford Motor 24% Simon Property 1%
Amazon.com -39% Freeport-McMoRan -32% Southwest Airlines 6%
Apple 1% General Dynamics 5% Sprint 43%
Aptargroup -1% General Motors 19% Stryker 1%
Arthur J Gallagher 1% Hershey 9% Tesla Motors 112%
Baker Hughes 65% Kimberly-Clark -1% Texas Instruments 9%
Boeing 34% LinkedIn 44% T-Mobile US 23%
Bristol-Myers Squibb 18% Lockheed Martin 26% Twitter 33%
Chevron 74% MasterCard 10% Under Armour 16%
Chipotle Mexican Grill -50% Mylan pushed United Parcel Service 1%
Coca-Cola 2% Northrop Grumman 7% VF Corp -1%
Colgate-Palmolive 0% Panera Bread 2% Visa 7%
Comcast 0% Phillips 66 18% Waste Management 5%
ConocoPhillips 4% Procter & Gamble 5% Xerox 0%

 

Two large technology companies stole the show for earnings releases last week with one doing well and the other not so well. Tesla beat market expectations last week by more than 100 percent after posting gains of $0.71 per share, while analysts were looking for -$0.54. Tesla turned in its second quarterly profit ever. The company attributed the success to product launches, new store locations and increased efficiencies. On the flip side last week, Amazon posted a surprising miss in earnings when compared to analysts’ expectations. Amazon also lowered its guidance for the fourth quarter of 2016, which is a big deal since fourth quarter is when Amazon sees a huge uptick in holiday shopping. Just a few weeks ago Amazon announced that it would be hiring 120,000 seasonal workers to help with the holiday rush. Hiring such a large number of holiday workers for a season that is expected to be lower than first thought could put pressure on the margins at Amazon, something analysts are concerned about going forward. Other technology giants LinkedIn and Twitter both posted solid quarterly results last week. Chipotle was the largest miss last week, missing expectations by 50 percent, which is really saying something because expectations had been lowered by a very large amount over the past few months. Apparently, consumers are less forgiving than analysts first thought.  Many had thought consumers would give Chipotle a second chance after having so many problems with E.coli less than 18 months ago. Apple also posted results last week and showed that sales are starting to come under pressure, especially from China where year-over-year sales are down 30 percent.

 

According to Factset Research, we have seen 293 (58 percent) of the S&P 500 companies release their results for the third quarter of 2016. Of the 293 that have released, 74 percent have beaten earnings estimates, while 8 percent have met expectations and 18 percent have fallen short of expectations. When looking at revenue, of the companies that have reported, 58 percent of the companies have beaten estimates, while 42 percent have fallen short. Both the revenue figures as well as the earnings per share figures declined over the course of the previous week when compared to the levels seen two weeks ago. Financials continued to be the largest driving force behind the positive results thus far in the earnings releases. The earnings growth rate for the third quarter is easily beating market expectations. Expectations had been for a -2.2 percent rate of change on the S&P 500 earnings for the third quarter and so far with more than half of the companies having reported earnings the current rate is a positive 1.6 percent. If we see earnings positive for the quarter it would be the first quarter of positive earnings growth for the S&P 500 since the first quarter of 2015. Such strong earnings from the S&P 500 companies that have released earnings could entice the Fed to increase rates at the December meeting on the theory that the economy and corporate America is improving.

 

This week, though very busy, is slightly less busy than last week when looking at the total number of companies releasing their earnings for the third quarter. The table below of well-known companies shows the companies that have the greatest potential to move the markets highlighted in green:

 

3D Systems Coach Office Depot
Activision Blizzard Cummins Owens & Minor
AIG Dennys Papa John’s
Allstate Estee Lauder Papa Murphy’s
AmerisourceBergen Facebook Prudential Financial
Anthem Hain Celestial Scotts Miracle-Gro
Aqua America Hyatt Hotels SolarCity
Avis Budget J & J Snack Foods Starbucks
Big 5 Sporting Goods Kate Spade Time
Brookdale Senior Living Kellogg Time Warner
Carbonite Manitowoc Transocean
Cardinal Health Molson Coors Brewing United States Steel
CenturyLink Mylan Western Union
Church & Dwight Noble Energy Whole Foods Market
Clorox Noodles & Co Zillow

 

This week the focus starts to shift toward more consumer directed companies, as will be the case over the coming weeks, with the quarterly earnings season drawing to a close when the big retailers release their results. The bar has been set pretty high for Facebook this quarter after the strong performance by two of its peers was revealed last week. Starbucks and Wholefoods will provide an interesting glimpse into the higher end retail business during the quarter. Overall, if the negative growth rate that was expected going into the quarter comes to fruition, we will likely see quite a few companies miss their expectations over the next couple of weeks.

 

Global news impacting the markets:

 

Global news last week held few headlines that impacted the global financial markets. In the UK the markets got a little bit of a bump from the latest GDP figures, which showed that the economy in the UK grew at a 2 percent rate during the third quarter. This figure, however, doesn’t show the amount of concern that is currently being put into the economy with regard to the Brexit that looks to be moving forward early next year. Oil last week looked like it fully rolled over in terms of price movement, falling back below $50 per barrel. You may remember that in late July OPEC held a meeting that was not expected to yield any tangible results, yet the announcement of a production cut/freeze was concocted. Since that time, there has been a lot of speculation about whether the group can get everyone behind the cut/freeze. Last week the news was leaning more towards nothing being accomplished. At a meeting in Vienna, OPEC and non-OPEC member countries failed to reach any specific terms pertaining to production figures with Iran even going as far as saying the country will likely not even freeze production. Iran will be a lynch pin in the whole deal, because the Saudis will certainly not allow the Iranians to gain any market share from them. If there are no hard figures about production, we will likely see oil prices continue to fade back down to about $40 per barrel. Aside from oil, a few economic figures and the UK GDP figure, the global financial news and markets focused on what is going on here in the US.

 

Technical market review:

 

The time frame on the charts below was updated this week; each of the charts now starts on 3/31/2016. The blue lines represent the closest level of support for each of the indexes, established by points the markets have touched in the past prior to bouncing higher. The blue lines on both the S&P 500 and the Dow were lowered this week as the previous support level had been broken for more than two weeks, indicating that it was no longer a support level in the current market environment. The red lines on the three major indexes are the closest level of resistance for each of the indexes based on their recent highs. For the VIX, the red line remains the rolling 52-week average level of the VIX.

4-charts-combined-10-31-16

The NASDAQ (lower left pane above) really bucked the trend last week and moved down a noticeable amount, quickly closing in on its most recent level of support. However, since the index is above that level of support, it is technically still the strongest of the three main US indexes. Both the Dow (upper right pane) and the S&P 500 (upper left pane) remain virtually tied in terms of technical strength, with a tie breaker going to the Dow. Essentially, both the Dow and the S&P 500 are moving sideways, as they have been for the past few weeks. Earnings season, while going better than expected, as discussed above, seems to be fully offsetting the political fears that would otherwise be seen in the markets this close to a very uncertain election. But the overall fear that is built into the current market increased last week, at least as measured by the VIX (lower right pane above), which shot back up over the last four trading days of the week and ended the week near the average level that we have seen on the VIX over the past year.

 

Market Statistics:

 

The US markets were mixed last week with the Dow turning in a positive week, while the other two indexes declined:

 

Index Change Volume
Dow 0.09% Average
S&P 500 -0.69% Average
NASDAQ -1.28% Average

 

Volume came back to average last week on all three of the major indexes, which was the first time in several weeks that we have seen volume at or above average. Much of this uptick in volume was due to investors adjusting positions on earnings results. Overall, the indexes ended the week in a risk-off fashion, meaning the most risky index (the NASDAQ) saw the largest decline, while the Dow (safest index historically) turned in the best results.

 

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

 

Top 5 Sectors Change   Bottom 5 Sectors Change
Aerospace & Defense 2.72%   Healthcare -2.75%
Regional Banks 1.08%   Home Construction -3.28%
Utilities 0.97%   Pharmaceuticals -3.55%
Telecommunications 0.77%   Medical Devices -4.23%
Global Real Estate 0.58%   Healthcare Providers -5.35%

 

The risk-off trade that permeated the broad indexes last week was seen in the sector movements. The risk-off sectors of Aerospace, Utilities, Telecommunications and Real Estate all turned in gains for the week. Regional Banks was the only sector in the top five that is not a defensive sector, with the positive movement for the sector last week being attributed to positive earnings announcements. On the flip side, anything healthcare related once again had a very difficult week; the group made up four of the bottom five performing sectors in the markets.

 

Fixed income investments last week here in the US were mixed as investors await the November meeting of the Fed, which takes place this week:

 

Fixed Income Change
Long (20+ years) -2.15%
Middle (7-10 years) -0.70%
Short (less than 1 year) 0.01%
TIPS -0.42%

Global currency trading volume was above average last week, with the exception of high volume on the Mexican Peso, thanks to a large decline on Friday. Overall, the US dollar declined 0.35 percent against a basket of international currencies. The best performing of the global currencies last week was the Chile Peso, as it gained 2.33 percent against the US dollar. The worst performance among the global currencies was seen with the Mexico Peso, as it declined by 2.04 percent against the value of the US dollar. Much of the decline in the Mexican Peso was due to fears that Trump may win the US election. It would be very bad for the Mexican economy if he follows through with any of the campaign threats about the country.

Commodities were mixed last week as Oil moved lower, while all of the other major commodities moved higher:

Metals Change   Commodities Change
Gold 0.62%   Oil -4.09%
Silver 1.32%   Livestock 6.38%
Copper 5.49%   Grains 0.83%
      Agriculture 1.73%

The overall Goldman Sachs Commodity Index declined 1.58 percent last week, thanks in large part to the index being production weighted and Oil being the most heavily weighted commodity in the index. Oil declined by 4.09 percent, as mentioned above, in large part due to a lack of any concrete information about the discussed production freeze/cut by OPEC. Precious metals were positive last week with Gold and Silver turning in relatively small gains of 0.62 and 1.32 percent, respectively, while Copper jumped higher, gaining 5.49 percent on the week. Soft commodities were positive last week with Agriculture overall gaining 1.73 percent, thanks to a large jump in Livestock, which gained 6.38 percent in one of the largest weekly moves for the group that I can find looking back at a few years of data.

Top 2 Indexes Country Change   Bottom 2 Indexes Country Change
Caracas General Venezuela 5.43%   KSE 100 Pakistan -3.44%
WIG Poland 2.38%   OMX Copenhagen Denmark -6.32%

Last week was mostly a negative week for the global financial markets with only 36 percent of the markets turning in positive performance for the week. The best performing index last week was found in Venezuela and was the Caracas General index, which turned in a 5.43 percent gain for the week. The gain in Venezuela was a little surprising as the price of oil declining would make one think the country’s main index would have declined, but it moved counter as Venezuela is likely to keep production high, rather than going along with any future OPEC mandate. The worst performing index for the week was found in Denmark and was the OMX Copenhagen Index, which turned in a loss of 6.32 percent. Much of the decline in the index was tied to large losses seen from one of the country’s largest companies, Novo Nordisk, which declined more than 15 percent on Friday alone.

After giving back most of the gain the VIX saw two weeks ago, the VIX came back with a vengeance last week, gaining more than 20 percent over the course of the week. We had not seen a gain of more than 20 percent on the VIX since the first week of September. The current reading of 16.19 implies that a move of 4.67 percent is likely to occur over the next 30 days. The direction of the move over the next 30 days is unknown. We are now very close to the election here in the US and it would not be surprising see the VIX continue to move around wildly over the lead up to the election as the outcome seems to be very asymmetric.

For the trading week ending on 10/28/2016, returns in the hybrid hypothetical models* (net of a 1% annual management fee) were as follows:

  Last Week 2016 YTD Since 6/30/2015
Aggressive Model -0.85% -1.54% 2.68%
Aggressive Benchmark -0.56% 2.70% -2.52%
Growth Model -0.52% -0.28% 3.04%
Growth Benchmark -0.44% 2.27% -1.71%
Moderate Model -0.19% 0.96% 3.72%
Moderate Benchmark -0.31% 1.77% -0.99%
Income Model -0.03% 1.72% 4.39%
Income Benchmark -0.15% 1.06% -0.24%
S&P 500 -0.69% 4.03% 3.07%

*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 they held up relatively well except for a single stock’s movement. AmerisourceBergen (ABC) declined by more than 13 percent on Friday in a very awkward looking trade as the company made no major announcements. McKesson (MCK), one of the bigger companies in the healthcare distribution industry, however, turned in negative results and lowered its guidance of the rest of the year. In what looked like nothing more than a sympathetic trade, ABC and Cardinal Health both declined by more than 10 percent. ABC announces its earnings results later this week and I will be closely following any new developments. For those of you who have been in the hybrid models for the long term, you may remember that ABC has been sold several times over the years, with the first sales (trimming half of the position) going in when the stock was up more than 100 percent. Without the negative performance of ABC weighing on the models, each of the models would have been much closer to flat performance for the week.

 

Economic Release Calendar:

 

Last week was an average week for economic news releases with one release significantly beating expectations and one falling short:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Neutral 10/25/2016 Case-Shiller 20-city Index August 2016 5.10% 5.10%
Slightly Negative 10/25/2016 Consumer Confidence October 2016 98.6 100.8
Neutral 10/26/2016 New Home Sales September 2016 593K 610K
Negative 10/27/2016 Durable Orders September 2016 -0.10% 0.00%
Slightly Negative 10/27/2016 Durable Orders, Ex-Transportation September 2016 0.20% 0.30%
Slightly Positive 10/27/2016 Pending Home Sales September 2016 1.50% 0.60%
Positive 10/28/2016 GDP-Adv. Q3 2016 2.90% 2.50%
Neutral 10/28/2016 University of Michigan Consumer Sentiment Index October 2016 87.2 88.2

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

 

The economic news releases last week started on Tuesday with the release of the Case-Shiller 20-City Home Price index, which came in exactly as expected at a 5.1 percent gain on a year-over-year basis. This good announcement was somewhat overshadowed by the lower than expected reading on the Consumer Confidence index for the month of October. On Wednesday, the new home sales figure for the month of September came in slightly lower than expected and is now low enough to cause concerns about the US housing market. On Thursday, the negative release of the week was released, that being the durables good orders change for the month of September, which declined by one tenth of a percent. Expectations had been for zero, which was low going into the announcement, but seeing it actually post negative was a little disappointing when thinking of economic recovery. This negative perception about economic recovery in the US was short lived, however, as the government released its advanced estimate of third quarter GDP on Friday, which came in better than expected at 2.9 percent. While this is only an advanced figure and can be updated at least two more times over the coming months, the figure clearly shows that the US economy picked up during the third quarter after having a very rough first half of 2016. Wrapping up the week last week was the University of Michigan’s Consumer Sentiment index for the month of October (final reading), which came in very close to market expectations and had no noticeable impact on the markets.

 

This week the focus of the economic news releases is on the US Fed meeting as well as employment. The releases that could impact the markets are highlighted in green below:

 

Date Release Release Range Market Expectation
10/31/2016 Personal Income September 2016 0.40%
10/31/2016 Personal Spending September 2016 0.50%
10/31/2016 Core PCE Price Index September 2016 0.10%
10/31/2016 Chicago PMI October 2016 54.00
11/1/2016 ISM Index October 2016 51.70
11/2/2016 ADP Employment Change October 2016 165K
11/2/2016 FOMC Rate Decision November 2016 No Change
11/3/2016 ISM Services October 2016 55.8
11/4/2016 Nonfarm Payrolls October 2016 175K
11/4/2016 Nonfarm Private Payrolls October 2016 170K
11/4/2016 Unemployment Rate October 2016 4.90%

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 for the month of September. Both figures are expected to be slightly stronger than they have been the past few months, which would be positive for the economy if it turns out to be the case. Also released on Monday is the latest reading on the Core PCE Price Index, which is expected to show a meager 0.1 percent gain during the month of September. Normally this release is largely ignored by the market, but since it is one of the main indexes the Fed uses to judge inflation it will be more closely watched this week than at other times. The Chicago area PMI, also released on Monday, will be closely watched as we saw mixed manufacturing data out of two other regions over the past two weeks. On Tuesday, the overall ISM index for the month of October is set to be released with expectations of a reading that is only 51.70, very close to the inflection point of 50. If we see a reading under 50 it could be a downside catalyst for the markets, while a reading over the expected 51.7 will likely be ignored by the markets.  On Wednesday the ADP employment change figure for the month of October is set to be released with expectations of about 165,000 new jobs having been created during the month. The real story on Wednesday will be the Fed’s November meeting rate decision, which will be announced mid-day. Expectations are so low for a hike at this meeting that a hike would be shocking to the markets. However, the language of the statement when the Fed doesn’t raise rates at this meeting could hold some new insights into its thinking for December, which the market could run with. On Thursday the services side of the ISM is set to be released with expectations of a slight slowdown from the expansion levels seen in September. On Friday, the big releases of the week are released as the government releases a trove of employment data. The overall unemployment rate for the month of October is expected to decline to 4.9 percent from the current 5.0 percent seen in September; the payrolls figures are both expected to be slightly better in October than they were in September. As always, the labor force participation rate as well as wage growth will also be reported and could have a greater impact on the markets as the headline unemployment rate and payroll figures. If we see strong employment data released on Friday, it could solidify a rate hike at the December meeting of the FOMC.

 

Interesting Fact Is anyone watching football anymore?

 

NFL viewership has been steadily declining so far this year and it has some people within the organization very concerned. According to an article in The Week, the following declines have been seen when compared to 2015

 

Week 1 –  7 percent

Week 2 – 9 percent

Week 3 – 9 percent

Week 4 – 12 percent

 

The declines are not just on any specific network as all of the networks are experiencing declines. The starkest decline was seen on a Monday night football game on September 26th, when viewership was down 41 percent compared to the same game in 2015. Much of this had to do with the Presidential debate being held at the same time, but there are likely other factors at work as well. The NFL needs to figure out a way to deal with the declining viewership or it will start seeing much lower TV ad revenues, which could spell big trouble for the league.

 

Source: http://theweek.com/articles/657885/mystery-nfls-declining-ratings

For a PDF version of the below commentary please click here weekly-letter-10-24-2016

Commentary quick take:

 

  • Major developments:
    • Earnings season for the third quarter 2016
    • Slow growth in China
    • ECB sits still

 

  • Earnings season:
    • Better than expected
    • Financials continue to perform well
    • Netflix saw strong new international subscriber demand

 

  • China:
    • 7 percent growth in third quarter
    • Debt keeps mounting
    • Will China be able to control the situation?

 

  • ECB
    • No change to rates
    • No indication of changes to QE programs
    • Waiting on the Fed’s next move

 

  • Technical market view:
    • No change last week
    • Sideways movements in general
    • VIX gave back its gain from two weeks ago

 

  • Hybrid investments strategy update:
    • No changes to the models last week
    • RLI dropped on a difficult 3rd quarter
    • Earnings season is pushing stocks around

 

  • This week for the markets:
    • Earnings season continues
    • PMI data from around the world
    • 3rd quarter GDP estimate for the US

 

  • Interesting Fact: Donald Duck and Goofy

 

Major theme of the markets last week: Earnings for the third quarter of 2016

earnings-10-24-16

Third quarter earnings season was the main theme for the US financial markets last week. Earnings reported in aggregate thus far show a year-over-year decline of 0.3 percent, which represents the sixth consecutive quarter of such declines according to Factset research, a feat not seen going back to the third quarter of 2008. While there is a lot of hype about companies beating expectations, the fact remains that expectations for the quarter were for lower earnings than we saw this time last year. Sinking earnings are a sign of economic weakness and they are very difficult to turn around. One of the main factors in the negative earnings over the past several quarters has been the steep declines seen in the Energy sector; but while everyone was watching this specific sector, other sectors slowed down as well, seemingly unnoticed. We still have a long way to go in this earnings season, but it seems very likely that the overall growth rate for the S&P 500 will likely remain negative.

US news impacting the financial markets:

 

There was very little in the way of financial news impacting the US markets last week. In general, as will likely be the case for the next few weeks, the US financial markets watched earnings season get rolling and the Presidential election. Last week was the second week of earnings season for the third 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:

last-week-earnings-10-24-16

Last week the focus of earnings announcements seemed to be on financials and a few of the large technology companies in the S&P 500. Financials continued to show strong results. The sector continues to easily beat the markets’ expectations with double digit earnings surprises being the norm for the group so far this season. Technology saw a nice bump last week as Netflix turned in much higher than expected subscriber growth from outside of the US. Tech giant Microsoft also turned in a double digit gain for the quarter, thanks to its connectivity division and integrations with Windows 10 and other devices. One interesting earnings release last week was that of WD-40, which saw increased demand across much of its product base. This is seen as a yellow flag for the overall health of the US economy as people are opting to fix products rather than replace them, which is typically done going into times of economic uncertainty.

According to Factset Research, we have seen 117 (23 percent) of the S&P 500 companies release their results for the third quarter of 2016. Of the 117 that have released, 78 percent have beaten earnings estimates, while 5 percent have met expectations and 17 percent have fallen short of expectations. When looking at revenue, of the companies that have reported, 65 percent of the companies have beaten estimates, while 35 percent have fallen short. Both earnings per share and revenues per share improved on a weekly basis last week when compared to the prior week. Financials continued to be the largest driving force behind the positive results thus far in the earnings releases. Overall, the results that we have seen during this earnings season are better than expected, with overall earnings for the S&P 500 being -0.3 percent on a year-over-year basis, while expectations going into the quarter were for a -2.0 percent earnings growth rate.

 

This week, earnings season kicks into high gear, where it will stay for the next three weeks, as there are more than 1,500 companies that will be releasing their earnings results. The table below shows the companies that have the greatest potential to move the markets highlighted in green:

this-week-earnings-10-24-16
Several industry leaders report their third quarter earnings results this week. These companies include Google, Amazon, Apple, Exxon, Coca-Cola, Procter & Gamble and Visa. All of the above mentioned companies could cause the market to move one direction or the other with their announcements. Many investors will be watching Visa and MasterCard for indications of consumer spending and trends as these two credit card companies encompass much of the credit card industry here in the US and around the world. Tesla is a company that always garners a lot of press when it releases its earnings results as it is a disruptive company in the automotive industry that is pushing the limits of current automotive technologies. One theme that will likely be discussed by many of the multinational companies is that of the impact of currencies on earnings during the quarter. The biggest impact will be the decline in the British Pound, which declined a large amount during the third quarter and could adversely impact companies like P&G as well as Coca-Cola and Apple as they all produce a high amount of earnings from the UK.

Politics also played a small part in the US financial market movement last week as the third and final debate was held on Wednesday evening. The odds right now show that Hillary Clinton holds a sizeable lead in many of the battle ground states and that she will likely become the 45th US President. With 18 days to go, we could start to see more of a rotation out of sectors seen as politically risky under a Clinton presidency, sectors such as Pharmaceuticals and Financials. Going the other way would be sectors that should do well under a potential Clinton presidency, sectors such as Solar Technology, Infrastructure and Construction. We are still more than two weeks out from Election Day so anything could happen from here. One thing that is very unlikely to happen, however, is a rate hike by the Fed at the November 2nd meeting, as the odds of a hike at this meeting remain under 10 percent since the Fed does not want to appear to make a politically motivated move so close to the election. The table to the right shows the latest Fed watch numbers from the CME Group.

fed-watch-10-24-16

Global news impacting the markets:

 

There were two main topics last week in the global news that had a noticeable impact on the global financial markets, the first being China and the second being the European Central Bank (ECB).

china-funny-10-24-16

On Wednesday last week, China released its official GDP growth rates for the third quarter of 2016. The economy in China grew by 6.7 percent, which, not surprisingly, is right between the stated target growth rate of between 6.5 and 7 percent. According to the National Bureau of Statistics (NBS) in China, the economy is operating in a reasonable range, despite downward pressures. The NBS also took credit for the positive numbers by saying the efforts to implement structural reforms have taken effect and worked well. Very few economists outside of China and probably very few within China actually believe that China is growing at a 6.7 percent rate, but rather at something lower around 5 percent. There are concerns, however, that a lot of the growth in China is coming only because of a high amount of debt and leverage popping up in all different areas of the financial system in China. For instance, the housing market in China has held up very well and actually increased in value in many areas of China, but this is potentially due to a lot of lending and very low interest rates, as depicted in the chart to the right from the Financial Times. You can see that during the last 18 months when rates have been near 4.5 percent (dark line, left scale), the lighter colored line, which represents the total of mortgages as a percentage of GDP, has gone from about 20 to 24 percent. That four percent increase in dollar terms is equal to about $400 billion based on the $10 trillion in GDP in China. China is also artificially inflating other areas of its economy to achieve its targeted growth rate, but all of the actions being taken make one wonder if China could really be in for a hard landing. The other global news story that moved markets last week came out of the ECB and its inaction on anything.

china-mortgage-debt-10-24-26

The ECB held one of its policy meetings last week and, much to the markets’ dismay, said very little and did not make any changes to rates or its quantitative easing program. Many traders and economists had been anticipating that ECB President Draghi would announce the extension of the QE asset purchase program, but instead he did almost the opposite when he said that the topic was not even discussed at the meeting. Concerns were raised about the upcoming elections in both Italy and Germany, both of which will have taken place by the next meeting of the ECB. Not directly commented on, but plainly seen by reading between the lines, was the fact that the ECB doesn’t want to get out ahead of the US Fed in any major decision as all of the central banks around the world are awaiting action from the Fed on rates. Draghi classically kicked the can down the road when he said, “It’s quite clear our decisions in December will tell you what we are going to do in the coming months.”

 

Technical market review:

 

There were no major developments last week in the technical charts for each of the US indexes as they continue to bump along. In the charts below, the blue lines represent the closest level of support/resistance for each of the indexes, established by points the markets have touched in the past prior to bouncing higher. The red lines on the three major indexes are the closest level of resistance for each of the indexes based on their recent highs. For the VIX, the red line remains the rolling 52-week average level of the VIX.

4-charts-combined-10-24-16

Last week was a week of small daily movements with the biggest gains seen on Tuesday with the NASDAQ gaining 0.85 percent, thanks almost entirely to the Netflix earnings results released late Monday evening. Despite the positive gains from Netflix, the NASDAQ did not manage to break out of its most recent trading range (lower left pane above), but moved closer to its near term resistance level. Both the Dow (upper right pane above) and the S&P 500 (upper left pane above) essentially moved in a sideways fashion for the week last week, staying below their respective trading ranges. The VIX (lower right pane above) came tumbling downward, easily giving up all of the gains of two weeks ago as it is now significantly below the average level we have seen over the past year.

 

Market Statistics:

 

All three of the major US indexes ended the week higher than they started, mainly due to positive earnings results from a few very large companies:

 

Index Change Volume
NASDAQ 0.83% Below Average
S&P 500 0.38% Below Average
Dow 0.04% Below Average

 

All three of the major US indexes pushed higher last week, thanks to a boost on Tuesday from Netflix, which saw its strongest single day performance in many months after announcing better than expected international subscriber growth. Despite being in the middle of earnings season with some of the biggest stocks in the S&P 500 making notable moves last week, volume remains well below the average level that we have seen for the past year.

 

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

 

Top 5 Sectors Change   Bottom 5 Sectors Change
Regional Banks 3.28%   Transportation -0.17%
Materials 2.56%   Consumer Staples -0.50%
Healthcare Providers 2.22%   Home Construction -0.82%
Financial Services 2.04%   Telecommunications -1.75%
Financials 1.82%   Insurance -2.19%

 

Financials dominated the top 5 sectors last week, thanks to continued positive earnings in light of increasing rates on many government bonds, which in turn spurred increased trading during the third quarter. On the flip side, the negative performing sectors of the market continued to be the defensive areas with Consumer Staples, Telecommunications, Insurance and Transportation all turning in negative performance for the week. As we continue to move into earnings season, we will likely see large sectors of the market swing up or down based on posted results.

 

Fixed income investments last week here in the US were positive as there were almost no new developments in the guessing game of when the Fed will raise rates:

 

Fixed Income Change
Long (20+ years) 1.31%
Middle (7-10 years) 0.48%
Short (less than 1 year) 0.00%
TIPS 0.61%

Global currency trading volume was average as traders adjusted their positions in the Euro after the ECB statement. Overall, the US dollar gained .055 percent against a basket of international currencies. The best performing of the global currencies last week was the South African Rand as it gained 1.44 percent against the US dollar. The worst performance among the global currencies was seen with the Hungary Forint, as it declined by 1.61 percent against the value of the US dollar. Two honorable mentions this week in the currencies: the British Pound managed to turn in a gain of 0.09 percent against the value of the US dollar, the first gain in many weeks, and the Euro declined sharply on the ECB meeting results, giving up 0.8 percent against the US dollar during the week.

Commodities were mixed last week as Oil continued to move higher, while Copper was the sole commodity that moved lower:

Metals Change   Commodities Change
Gold 1.23%   Oil 0.35%
Silver 0.54%   Livestock 3.47%
Copper -0.76%   Grains 0.76%
      Agriculture 0.50%

The overall Goldman Sachs Commodity Index advanced 0.13 percent last week, during a week that did not see a large amount of changes in any of the major commodities. Oil gained 0.35 percent as there was little change in the language coming out of OPEC or any of the supply levels around the world. Precious metals were mixed last week with Gold and Silver turning around a multiple week decline trend, gaining 1.23 and 0.54 percent respectively, while Copper continued to push lower, falling by 0.76 percent. Soft commodities were positive last week with Agriculture overall gaining 0.5 percent, while Livestock rebounded 3.47 percent and Grains added 0.76 percent.

Top 2 Indexes Country Change   Bottom 2 Indexes Country Change
Merval Argentina 4.84%   NZX 50 New Zealand -2.45%
BUX Hungary 4.16%   CASE 30 Egypt -2.68%

Last week was mostly a positive week for the global financial markets with 86 percent of them turning in positive performance for the week. The best performing index last week was found in Argentina and was the Merval index, which turned in a 4.84 percent gain for the week. The worst performing index for the week was found in Egypt and was the CASE 30 Index, which turned in a loss of 2.68 percent, as the fighting between ISIS and the rest of the world seems to be intensifying in the region.

After moving higher by nearly 20 percent two weeks ago, the VIX last week gave up 17.25 percent, ending at almost the exact same spot it was two weeks ago. The current reading of 13.34 implies that a move of 3.85 percent is likely to occur over the next 30 days. The direction of the move over the next 30 days is unknown. If the 20 percent gain two weeks ago was because of uncertainty over the election (as Trump still looked like he had a reasonable chance), last week showed the fear leaving the market as it became more clear that Clinton is likely to win.

For the trading week ending on 10/21/2016, returns in the hybrid hypothetical models* (net of a 1% annual management fee) were as follows:

  Last Week 2016 YTD Since 6/30/2015
Aggressive Model -0.99% -0.69% 3.57%
Aggressive Benchmark 0.50% 3.23% -1.97%
Growth Model -0.78% 0.24% 3.59%
Growth Benchmark 0.40% 2.72% -1.27%
Moderate Model -0.55% 1.16% 3.92%
Moderate Benchmark 0.29% 2.08% -0.69%
Income Model -0.50% 1.75% 4.42%
Income Benchmark 0.15% 1.21% -0.09%
S&P 500 0.38% 4.76% 3.78%

*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. During earnings season, the individual equity positions owned within each model can noticeably impact the models on any given day. The biggest mover last week was insurance company RLI Corp, which moved to the down side. The company released results that were mixed as it saw revenues increase 1.9 percent and gross written premiums increase by 3.4 percent. However, net income decreased by 38 percent, thanks to larger than expected loss and settlement expenses in primarily one segment of its business. The business segment that caused the poor performance last quarter was the emergency transport vehicle insurance segment in New York, which saw several large litigation claim losses. Listening to the quarterly call and going through the documentation, it looks like the losses were one-time occurrences, but as the CEO said on the call, if this becomes a trend, the company will have to either pull out of the business segment or drastically change the pricing of the premiums. The stock was down a little more than 11 percent on the announcement the following trading day. This week, several more companies that are large individual equity positions will be releasing their results. With each release we could see the individual stock swing one way or the other. This is why the hybrid models own a basket of stocks and not just a very small number of very concentrated positions as good companies can be hit by difficult and seemingly random events.

 

Economic Release Calendar:

 

Last week was a slow week for economic news releases as there was only a single release that significantly missed expectations, highlighted below in red:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Negative 10/17/2016 Empire Manufacturing October 2016 -6.8 2.0
Neutral 10/18/2016 CPI September 2016 0.3% 0.3%
Neutral 10/18/2016 Core CPI September 2016 0.1% 0.2%
Neutral 10/19/2016 Housing Starts September 2016 1047K 1180K
Neutral 10/19/2016 Building Permits September 2016 1225K 1170K
Slightly Positive 10/20/2016 Philadelphia Fed October 2016 9.7 7.0
Neutral 10/20/2016 Existing Home Sales September 2016 5.47M 5.25M

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

 

Last week the economic news releases started on Monday with the release of the Empire Manufacturing index for the month of October, which was a very negative release. Expectations had been for a turnaround from -2 in September to a positive 2 in October, but the figure was even more negative, indicating a larger decline in manufacturing than was expected. Thankfully, this decline did not spill over into the Philly Fed number released later during the week. On Tuesday, the Consumer Price Index (CPI) for the month of September came in as expected, showing hardly any inflation at the consumer level, both overall and when looking at just core items. On Wednesday, housing starts and building permits were released with housing starts lagging a little, while building permits were stronger than expected. On Thursday the Philly Fed released its latest index of business conditions and manufacturing, which came in stronger than expected, providing some lift to a part of the economy being closely watched by the Fed. Wrapping up the week last week was the release of the existing home sales figure for the month of September, which came in a little higher than the market was expecting, but not high enough to see much reaction in the housing related stocks.

 

This week the focus of the economic news releases is on the US economy overall and the US consumer. The releases that could impact the markets are highlighted in green below:

 

Date Release Release Range Market Expectation
10/25/2016 Case-Shiller 20-city Index August 2016 5.10%
10/25/2016 Consumer Confidence October 2016 100.8
10/26/2016 New Home Sales September 2016 610K
10/27/2016 Durable Orders September 2016 0.00%
10/27/2016 Durable Orders, Ex-Transportation September 2016 0.30%
10/27/2016 Pending Home Sales September 2016 0.60%
10/28/2016 GDP-Adv. Q3 2016 2.50%
10/28/2016 University of Michigan Consumer Sentiment October 2016 88.2

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

 

This week the economic news releases start on Tuesday with the release of the Case-Shiller 20-City Home Price index for the month of August. Expectations are for a 5.1 percent gain to be shown in the release, but the data is so stale that it would take something drastically different than 5.1 percent for the market to take notice of this release. Also released on Tuesday is the consumer confidence index for the month of October, which is expected to show a decline from 104 down to 100.8 during the month. This decline is in line with what we have seen in the spending data for the same time period as well as the University of Michigan’s consumer sentiment index, so it should not come as a surprise to the markets. On Wednesday, new home sales for the month of September are set to be released with almost no change expected from the 609,000 level seen in August. On Thursday, the first of the big releases of the week is released, that being the durable good orders for the month of September, both including and excluding transportation. Expectations are for very low or even zero change, which leaves this release susceptible to a downside surprise should it post a negative figure. A negative reading on durable orders could prove difficult for the Fed to overcome in its decision making on when to increase rates. One Friday the release that everyone will have been waiting all week for will finally be released—the advanced estimate of third quarter GDP for the US. Unlike the Chinese third quarter figure, which was released faster and will not need any revisions, the US GDP figure is released three different times for the same time period as the number is fine-tuned as more data becomes available. While the first estimate may not be where it ends up, expectations are for a nice rebound to 2.5 percent, up from the final second quarter reading of 1.4 percent. It would be very nice to see a reading even higher than 2.5 percent, but it looks more likely that this release misses expectations rather than performs better than expected. The market could react to this release as it could have a notable impact on the Fed’s thinking about rates for the end of the year. This week wraps up on Friday with the release of the University of Michigan’s Consumer sentiment index for the month of October (final estimate), which is expected to show almost no change from the middle of the month estimate. In addition to the economic news releases, there are also speeches being made by three different Fed officials this week and any hints about upcoming policy movements could move the markets.

 

Interesting Fact Cartoons in the election

 goofy-donald-pa-county-10-24-16

The following are two images demonstrating just how crazy gerrymandering has become in the US.

The map below shows the actual 7th Congressional district for the state of Pennsylvania.

goofy-donald-pa-county-10-24-16-2

The district looks strikingly like Goofy kicking Donald Duck, I wonder if the people who drew the lines saw the humor in it as well?

 

Source: http://www.geocurrents.info

http://www.geocurrents.info/geopolitics/elections/gerrymandering-united-states-crimes-geography