For a PDF version of the below commentary please click here Weekly Letter 9-18-2017

Commentary quick take:

 

  • Major developments:
    • US markets rallied onward
    • Less impact from Hurricane Irma than first thought
    • Dreamers Act in Congress
    • North Korea at it again

 

  • US:
    • Hurricane Irma has come and gone
    • Healthcare reform push being launched in the Senate
    • Trump continues to be Trump
    • All eyes on the upcoming Fed meeting

 

  • Global:
    • North Korea launched another missile

 

  • Hybrid investments strategy update:
    • One new purchase
    • Defensively positioned

 

  • This week for the markets:
    • FOMC September meeting
    • North Korea uncertainty
    • UN General assembly meeting in NYC

 

  • Interesting Fact: The United Nations General Assembly

 

Major theme of the markets last week: Uncertainty over the Federal Reserve

The major focus of the financial markets last week was the Federal Reserve, including the September FOMC meeting that takes place on Tuesday and Wednesday of this week and the future composition of the FOMC. This month’s FOMC meeting is one of the more important meetings because it is followed by a press conference held by Chair Yellen. While it is widely expected that the Fed will not raise rates at this meeting, it is expected that the Fed will announce its plan to start unwinding its overgrown balance sheet in October. While the outline of how this unwinding will happen has been released, the fine details have yet to emerge. Hopefully, those details will be released this week. In addition to the upcoming meeting, the markets were abuzz over who the next chair of the Fed will likely be after Chair Yellen’s term is over early next year. Last week, it became known that economic adviser to the President Gary Cohn is no longer in the running for the position after disagreeing with President Trump on some of his recent comments. Current Vice Chair Stanley Fisher added further fuel to the speculation after he announced his unexpected resignation from the Fed. Currently, looking at the odds of who will likely be the Fed chair this time next year, Chair Yellen is leading the pack, despite her coy responses when asked if she would consider staying on as Fed chair if asked to do so by the President. The bigger question is whether the Fed will remain balanced in terms of its thinking or whether the scales will tip to being significantly more hawkish than the Fed has been under Chair Yellen, potentially moving to much too quickly in some of its policies.

 

US news impacting the financial markets:

 

There were two main focal points for the US media last week with the first being the aftermath of Hurricane Irma and the second being the political agenda in Washington DC. Thankfully, Hurricane Irma had much less of an impact on Florida than was initially expected by the computer modeling systems that varied wildly in their prediction of both the path and strength of the storm upon hitting the US. While the storm did officially hit the Florida Keys as a category 4 storm, it quickly started to dissipate and was weaker than expected when it came on shore in southwestern Florida. Some of the most impacted areas of the financial markets leading up to Hurricane Irma making land fall rebounded last week with insurers enjoying a nice move higher as the damages from the hurricane, initially estimated to be as high as $200 billion, are now looking to be about $20 billion. The impact of Irma and Harvey has yet to be seen in many of the economic figures as they are generally laggards when it comes to weather related incidents. We did see initial jobless claims decline last week as few people in Houston and Florida were able to make it in to file, which is typical during hurricanes. Auto sales took a dive at the end of the month last month and helped drive the overall retail sales figure for the month of August down to a negative 0.2 percent. This negative retail sales figure will likely swing back the other way in the coming months as new cars will need to be purchased to replace the cars damaged by the storms and as people buy supplies to repair the damage caused by the storms. For the next few months, the hurricanes will likely be blamed for any negative economic developments we see in the US economy, while positive developments will likely not be attributed to the storms. Storms are not only brewing in the oceans these days, as Washington DC has become stormier over the past week as President Trump and Republicans desperately try to get meaningful legislation completed before the end of September.

 

It may seem odd that there is such a push to get legislation passed by the end of September, but that is the deadline for Republicans to pass budgetary legislation with a simple majority of Senate members (51 votes). After September 30th, the vote requirement to pass health care reform under non-budgetary rules moves up to 60 votes. With Republicans controlling 52 of the 100 seats and having Vice President Pence as a tie breaking vote, it is now or never for the current Congress to pass a healthcare reform bill. Currently, it does not look like the Republicans have cobbled anything together that can garner the needed 50 votes for passage, but as we get closer to the end of the month, the wheeling and dealing will likely only become more intense. While Republicans are quickly working on healthcare reform, President Trump continues to try to make deals with the Democrats, much like he did with the Hurricane relief funding being tied to the debt ceiling debate and the temporary budget two weeks ago. This time, it is the Dreamers Act, or DACA, that he is negotiating with Democrats, as Republicans cannot seem to agree on how to fix the broken immigration laws that fall under the Dreamers Act. While the financial markets may see little impact either way from the outcome of the President’s negotiations, it does cause investors to question the ability of Republicans to get anything done. Most impactful to the markets will be tax reform, which we have been hearing about for months, but have received very little information about. While the goal is to lower taxes, it is looking increasingly difficult to do so without having long term negative impacts on the US debt level. This of course will lead many Republicans to vote against the measure on fiscal principals as they want a deficit neutral change to the tax code. The risk on tax reform seems to be growing to the downside, as is the risk of nothing being accomplished given the current divided nature of Congress.

 

Global news impacting the markets:

 

There was very little news on the international front last week that impacted the global financial markets. North Korea saw further sanctions imposed on the country early last week and responded by firing yet another missile over Japan, crash landing it in the Pacific Ocean. This time, the missile was launched far enough that it easily put the US territory of Guam within striking range. Previously, there had been some questions about the ability of North Korea to launch a missile such a long distance. The world was watching President Trump’s reaction to the missile launch, but he played it much more coolly than he has in response to previous actions by North Korea. At this point, it seems the US is willing to continue trying the diplomatic route and further pressuring the allies of North Korea, mainly China and Russia, into making North Korea stop its nuclear and missile program ambitions. For now, the tensions appear to be abetting the situation with North Korea, but the US is still saying that military options remain on the table. On the news of the missile launch toward Japan, the Asian stock market futures declined, but these declines were quickly made back as it was just another launch by North Korea that had no physical impact on anything.

 

Technical Update: Technical markets updates going forward will be included when meaningful changes occur, rather than essentially repeating the same information week after week.

 

Hybrid model performance and update

For the trading week ending on 9/15/2017, returns in the hybrid and quant hypothetical models* (net of a 1% annual management fee) were as follows:

 

Last Week 2017 YTD Since 6/30/2015
Aggressive Model 0.83% 6.66% 12.43%
Aggressive Benchmark 1.05% 13.49% 13.27%
Growth Model 0.74% 6.29% 11.12%
Growth Benchmark 0.82% 10.47% 10.63%
Moderate Model 0.55% 5.23% 9.09%
Moderate Benchmark 0.59% 7.53% 7.92%
Income Model 0.51% 4.87% 8.52%
Income Benchmark 0.31% 3.95% 4.44%
Quant Model 0.38% 13.71%
S&P 500 1.58% 11.68% 21.19%

*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 was a single change in the hybrid models over the course of the previous week and that was the addition of a new position in PIZ, the Powershares developed markets momentum ETF. The fund was bought with no transaction fee on the Schwab platform and invests in the highest momentum stocks around the world, excluding the US. The position was purchased for several reasons with the first being the low correlation of the ETF to the other holdings within the hybrid models. The second reason for purchasing the fund is that the returns that have been achieved over the past year are very good on a risk adjusted basis. The final reason is that adding the position diversifies some of the hybrid models’ exposure away from the US economy and the potential problems that could arise from Congress later this year and instead invests in solid foreign countries such as Switzerland, France, Canada and the UK, which combined add up to about 55 percent of the overall ETF’s holdings. The fund was bought using excess cash holdings in the various models.

 

Market Statistics:

 

The US markets were up last week as volume remained below average:

 

Index Change Volume
Dow 2.16% Below Average
S&P 500 1.58% Below Average
NASDAQ 1.39% Below Average

 

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

 

Top 5 Sectors Change Bottom 5 Sectors Change
Semiconductors 5.57% Software -0.26%
Oil & Gas Exploration 5.41% Infrastructure -0.43%
Regional Banks 4.43% Biotechnology -0.68%
Energy 3.76% Transportation -0.77%
Financials 2.58% Utilities -1.10%

 

The top performing sectors last week moved mainly due to an increase in the price of oil and the increasing odds of a rate hike at the December FOMC meeting. The negative performing sectors had more going on that impacted them, as defensive sectors such as Utilities, Transportation and Infrastructure made up three of the bottom performing sectors due to a risk-off trade playing out last week. Biotechnology and Software seemed to be negatively impacted by one-off events with individual companies, combined with investors pulling profits out of these sectors, which have seen positive gains over the past few weeks.

 

Fixed income investments in the US were mixed last week as yields increased as the odds of a Fed rate hike by the end of the year also increased:

 

Fixed Income Change
Long (20+ years) -1.66%
Middle (7-10 years) -0.87%
Short (less than 1 year) 0.01%
TIPS -0.62%

 

US Dollar 0.6%
Best and Worst Currencies Change
U.K. pound 3.0%
Japan yen -2.7%

 

After seeing several of the major US government bonds hit some of the lowest yields of the year two weeks ago, it was not surprising to see that yields picked back up a little last week and, in turn, bond prices declined. As is typically the case, the longer maturity bonds saw the greatest impact and the shorter dated paper saw the least amount of impact on prices. This increase in bond yield helped drive up the value of the US dollar against other currencies.

 

Commodities were mixed last week as metals declined, while soft commodities were mixed:

Metals Change GS Commodity Index 2.00%
Gold -1.91% Commodities Change
Silver -2.35% Oil 4.83%
Copper -3.06% Livestock -0.67%
Grains 0.70%
Agriculture 1.11%

 

Oil was the primary mover in the commodities last week, gaining 4.83 percent for the week as global demand slightly outpaced supply in the US due to the industry continuing to get back online from the hurricanes that hit the US over the past month. Orange Juice Concentrate saw a decline last week after the significant increase experienced two weeks ago ahead of Hurricane Irma making landfall in Florida. The decline last week was due to the damage being reported to the orange crop in Florida being less than was initially anticipated. Metals all declined last week with Copper leading the way lower over fears that the Chinese economy may further slow down before the current cycle is over, thus causing less demand for the industrially used metal.

 

Top 2 Indexes Country Change Bottom 2 Indexes Country Change
Sao Paulo Bovespa Brazil 3.66% Merval Argentina -1.26%
Nikkei 225 Japan 3.29% FTSE 100 U.K. -2.20%

Last week was a positive week for the global stock indexes, with 74 percent of the global markets posting gains. Brazil bounced back last week as the ongoing corruption investigations into various major businesses within the country appear to be winding down, at least for now. The leader to the downside last week was the UK based FTSE 100 after news that the Brexit negotiations are barely moving at all and that there appears to be no letup in sight surfaced.

The see-saw effect on the VIX continued to play out last week as the VIX declined by 16 percent; this follows on the heels of a gain of more than 20 percent last week. Volatility of the VIX seems to be back, but as we have seen in the past, the VIX can move in very odd ways for an extended period. After starting the week near the average level that we have seen on the VIX over the past year, the VIX ended the week closer to the lowest levels that we have seen this year. The current reading of 10.17 implies that a move of 2.94 percent is likely to occur over the next 30 days. As always, the direction of the move over the next 30 days is unknown.

Economic Release Calendar:

 

Last week was a normal week for economic news releases in terms of the number of releases, with two releases falling short of expectations, while one significantly beat expectations:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Neutral 9/13/2017 PPI August 2017 0.20% 0.30%
Neutral 9/13/2017 Core PPI August 2017 0.10% 0.20%
Neutral 9/14/2017 CPI August 2017 0.40% 0.30%
Neutral 9/14/2017 Core CPI August 2017 0.20% 0.20%
Negative 9/15/2017 Retail Sales August 2017 -0.20% 0.10%
Negative 9/15/2017 Retail Sales ex-auto August 2017 0.20% 0.50%
Positive 9/15/2017 Empire Manufacturing September 2017 24.4 20
Neutral 9/15/2017 University of Michigan Consumer Sentiment Index September 2017 95.3 95.5

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

 

The inflation related economic news releases, Consumer Price Index (CPI) and Producer Price Index (PPI), last week came in largely in line with expectations and likely had no meaningful impact on the Fed’s current policy thinking. Retail sales for the month of August, released on Friday, missed market expectations by a wide margin and posted an overall decline of 0.2 percent during the month. The primary drag on retail sales was a lack of sales in the automotive segment of the calculation as car dealers were largely past the summer savings deals and not yet to the fall new model year sales. Hurricane Harvey could have also adversely impacted auto sales at the end of the month as car shopping is not a high priority for people bracing for a hurricane to hit. Retail sales have been weak now for the majority of 2017 and remain an area of concern for most economists regarding the overall health of the US economy. One of the first manufacturing related prints for the month of September, the Empire Manufacturing index, was released on Friday last week and came in better than expected, showing continued fast paced growth in the manufacturing industries in the great New York area.  Consumer Sentiment for the month of September’s first reading wrapped up the week last week and remained, as expected, at an elevated level.

 

This week is a slow week in terms of the number of economic news releases, with all eyes being on the Fed meeting that concludes on Wednesday. The release with the greatest potential to impact the markets is highlighted in green below:

 

Date Release Release Range Market Expectation
9/19/2017 Housing Starts August 2017 1180K
9/19/2017 Building Permits August 2017 1220K
9/20/2017 Existing Home Sales August 2017 5.45M
9/20/2017 FOMC Rate Decision September 2017 No Change
9/21/2017 Philadelphia Fed September 2017 18.0

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

 

Housing data starts off the economic news releases this week and expectations are for very minor changes to the three housing related releases this week. While there could be a small amount of impact on the home builder stocks if these releases do not come in as expected, the odds of them moving the overall market is very low. Wednesday is the big day for the markets this week as it is the conclusion of the FOMC meeting for the month of September and while there are virtually no expectations that the Fed will change rates at this meeting, the markets will be intently watching and listening for any indication of when rates may change in the future as well as guidance on how and when the Fed plans to wind down its balance sheet. The week wraps up on Thursday with the Philly Fed index, which is expected to show almost no change over the August level and should have little, if any, impact on the overall markets. There are three Fed officials giving speeches this week and Chair Yellen giving her press conference following the FOMC meeting. The markets, as usual, will likely be watching these events for clues about upcoming Fed policy and may adjust quickly to new or different information.

 

Interesting Fact — 67th UN General Assembly is this week

 

This week marks the 67th General Assembly meeting of the UN, which takes place in New York City. US President Trump will address the assembly on Tuesday and falls in line with a very long list of interesting speeches that have been given. Below are some of the more interesting speeches that have occurred over the years:

 

2006 Hugo Chavez

The “devil” had spoken yesterday, referencing then US President Bush

 

1960 Fidel Castro

“Philosophy of Robbery” ran 4 hours and 29 minutes and holds the record for longest speech given at the UN general Assembly

 

2009 Muammar Gaddafi

The speech was supposed to be 15 minutes, but ran an hour and a half with multiple translators having to step in and translate what were essentially political ramblings

 

Source: 112.international/article/the-most-famous-speeches-in-the-history-of-the-un-general-assembly-20724.html

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For a PDF version of the below commentary please click here Weekly Letter 9-11-2017

Commentary quick take:

 

  • Major developments:
    • Hurricane Irma
    • Holiday trading week
    • Political fight kicked down the road

 

  • US:
    • Hurricane Irma
    • Congress accomplished some things
    • Republicans are not happy with President Trump

 

  • Global:
    • ECB is not changing anything
    • Brexit could change everything (for the UK)
    • North Korea did nothing
    • Russia starting its own war games

 

  • Technical market view:
    • US markets were negative
    • All three indexes are above their trading ranges
    • VIX jumped nearly 20 percent

 

  • Hybrid investments strategy update:
    • No changes
    • Defensively positioned

 

  • This week for the markets:
    • Congress continues to trudge along
    • Russia’s military exercises
    • North Korea uncertainty

 

  • Interesting Fact: Brexit law changes

 

Major theme of the markets last week: Hurricane Irma

Last week was a shortened trading week due to the Labor Day Holiday on Monday. The major theme of the media and markets was Hurricane Irma, which was barreling toward Florida. Even Congress reconvening from the month-long August recess had a difficult time competing with Hurricane Irma for media coverage. One of the most direct market impacts seen last week with Irma approaching was in the orange juice concentrate futures, as more than one quarter of all US grown oranges were in the path of the storm. The contracts on orange juice futures increased by 13 percent during the four days of trading last week, topping out at $154 per contract. While this may seem like a relatively large number to someone not familiar with orange juice futures, trading prices have actually been coming down steadily, having been over $220 per contract at the start of the year.

 

US news impacting the financial markets:

 

Aside from Hurricane Irma, the biggest news last week was the storm brewing in Washington DC that welcomed lawmakers back into session. Last week, I outlined the top 7 things that could potentially adversely impact the financial markets over the coming weeks. The good news last week was that the top three items were rolled into one that was passed and finished. These were: hurricane relief funding, the debt ceiling and a short-term budget that keeps the government’s doors open. President Trump surprised almost everyone last week when he met with Congressional leaders at the White House and fully took the terms of the Democrats’ demands, making a deal with them. Under the terms of the deal, the first tranche of hurricane relief funding was set in motion and the debt ceiling fight and 2018 budget for the government was kicked out until December 15th. While there was little more done than kicking the can down the road, which is the preferred method of dealing with problems for most politicians, it really stung the Republicans. In the minutes prior to the meeting at the White House, Republicans had called on Democrats to not use the hurricane relief funding as a political football to get other pieces of their agenda passed. Whatever the reason, President Trump continued to make the Republican party look bad last week by leaning across the aisle to work with the Democrats. His actions drove further division within a Republican party that is trying to keep four distinct factions within its own walls in line in order to have any chance at getting anything done. President Trump said that his taking the deal was a gesture of how Congress can work together in the future on even bigger deals, but the political pundits on both sides of the aisle agree that the likelihood of anything substantial getting done under this Congress is very low. With a large portion of their plates having been cleared for the time being, Congress is once again faced with two major topics to work on: tax reform and the never-ending healthcare reform.

 

Following President Trump’s snub of the Republican leadership, several high-ranking Republican members of Congress made it very clear that a cut in corporate taxes down to 15 percent is off the table and that they would be working to try to lower the corporate tax rate to something in the range of 22 percent (in line with the rest of the developed world). While this would still be a substantial tax cut to corporate American, it is less than the markets appear to be pricing in, as they continue to hold on to hope that rates will be cut down to 15 percent. On the healthcare reform front, not much changed during the recess, but Republicans seem to think they should give the topic another run. It seems highly unlikely that a package deal could be agreed to that would appease enough Republicans to get it passed in both the House and the Senate. With no major legislation passed under the current Congress and President Trump, we will likely see more acts of desperation from Republicans trying to accomplish anything substantial from a legislative perspective as we near the end of the year.

 

Global news impacting the markets:

 

Global news last week focused on two geographic areas of the world: Europe and Asia. In Europe, the news focused on the ECB’s September meeting and the Brexit in the UK. ECB President Mario Draghi held a press conference following the conclusion of the ECB’s September policy meeting. At the meeting, it was decided there would be no changes in the key interest rates the ECB controls; this was largely expected. There were also no changes to the forward guidance of rate levels or time horizon for when rates could potentially change. This was a little surprising to the markets as many ECB watchers had been expecting some additional information about the future of rates and timing from the ECB. The bigger surprise, however, was that President Draghi signaled that the ECB would not be lowering its current quantitative easing bond buying program from €60 billion per month. Expectations had been for this meeting to contain the framework for how the ECB would slowly start to reduce its bond buying program down to about €20 billion per month, but all of that was put on hold as the strength of the Euro is starting to cause concern among ECB members. It is anyone’s guess if a change to the bond buying program will be announced at the October or the December meeting, but the general thinking is that there will be an announcement from the ECB about its future bond buying by the end of 2017. While the ECB was busy last week, the UK was gearing up for a fight about the Brexit.

 

This week, Parliament in the UK is debating the EU Withdrawal bill, which overturns the 1982 European Communities Act that added the UK to the forming EU. The bill being debated also converts all existing EU laws into UK laws so that on Brexit day there are no mismatches in terms of laws in the UK. If the bill does not pass because of members of the Labour party voting against their party and against the bill, it could cause even more confusion over what will happen when the Brexit takes place. Markets in the UK and around the world are largely currently ignoring the happenings of the Brexit debate as it is too far in the future to garner much attention, but as we get closer, the impact of the “messy” Brexit could have adverse impacts on the global financial markets.

 

In Asia, the world waited for the next action by North Korea, which two weekends ago detonated a supposed Hydrogen bomb in an underground test. Thoughts were that North Korea would likely launch another ICBM over the past weekend as September 9th is Founder’s Day in North Korea and a day the country has historically launched military weaponry. There were reports of a missile being moved during the night toward a west coast launching area, but North Korea did not launch or test anything over the past week. Tensions remain elevated in the region as the US seems to be going about a diplomatic route of new sanctions, while keeping all military options on the table.

 

Technical market review:

 

No changes were made over the course of the previous week in the technical charts drawn below. The green lines remain the daily index movements, while the yellow lines are the trading ranges that have been drawn based on the index movements of the past several weeks. The red line on the VIX chart remains the 52-week average level of the VIX.

There were no significant changes in the technical charts last week as all three of the major US indexes remain above their most recent trading ranges. The Dow (upper right pane above) currently looks to be the strongest in terms of technical strength as it is above its most recent trading range by the largest amount. Both the S&P 500 (upper left pane above) and the NASDAQ (lower left pane above) are virtually tied as both moved down toward their trading ranges, but failed to fall back into their ranges. The VIX (lower right pane above) moved higher last week, as is expected during a downward moving week for the three major indexes, but failed to make it back above the average level from the past year. The three major US indexes have been moving essentially sideways for the past two months as the luster of the new President and Congress seems to be wearing off and the reality of a very old bull market combined with political gridlock is setting in.

 

Hybrid model performance and update

For the shortened trading week ending on 9/8/2017, returns in the hybrid and quant hypothetical models* (net of a 1% annual management fee) were as follows:

 

Last Week 2017 YTD Since 6/30/2015
Aggressive Model -0.14% 5.77% 11.48%
Aggressive Benchmark -0.05% 12.31% 12.10%
Growth Model -0.07% 5.50% 10.29%
Growth Benchmark -0.04% 9.58% 9.74%
Moderate Model 0.02% 4.65% 8.48%
Moderate Benchmark -0.02% 6.90% 7.29%
Income Model 0.07% 4.33% 7.96%
Income Benchmark -0.01% 3.63% 4.12%
Quant Model 0.19% 13.27%
S&P 500 -0.61% 9.94% 19.31%

*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 last week in the hybrid models. The hybrid models continue to perform well in downward market movements as they remain set up with an overweighting toward caution. Cash levels remain elevated and will be deployed as investment opportunities arise.

 

Market Statistics:

 

The US markets were down last week as volume remained below average, as expected:

 

Index Change Volume
S&P 500 -0.61% Below Average
Dow -0.86% Below Average
NASDAQ -1.17% Below Average

 

After seeing a strong move upward two weeks ago, the US markets gave back about half of those gains last week. Volume was very low here in the US, thanks in large part to the lack of trading on Monday due to the Labor Day holiday. However, even considering the shortened trading week last week, volume was still below average. Now that we are past Labor Day and less than two weeks away from the official start of Fall (September 22nd this year, in case you were wondering), we should see overall market volume start to pick back up to normal as investors adjust their positions for the end of the year.

 

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

 

Top 5 Sectors Change Bottom 5 Sectors Change
Medical Devices 2.05% Multimedia Networking -2.33%
Energy 1.75% Broker Dealers -2.64%
Healthcare 1.53% Financial Services -2.80%
Utilities 1.23% Regional Banks -4.20%
Pharmaceuticals 1.15% Telecommunications -6.62%

 

Healthcare continued to run hard last week as the sector overall made it among the top five performing sectors, as did both Medical devices and Pharmaceuticals. Some of the increase last week was due to rumblings that Congress may take up the healthcare debate before the end of the year, but that was early in the week. After President Trump’s deal with Democrats, it now seems less likely that Republicans will be able to bring the topic up for debate. Energy and Utilities also made the top performing sectors as damage to the energy sector from Hurricane Harvey is looking to be less than initially aniticipated. Utilities increased last week as investors increased their positions in this most defensive of market sectors.  On the negative side last week, Telecommunications made the list for the second week in a row, this time in the bottom spot as investors continue to push the sector down, primarily due to worsening margins and increasing user data demands. Financial related sectors took the next three spots as Regional Banks, Financial Services and Broker Dealers all saw inferior performance last week. Equifax didn’t help things in the financial services sector as the company announced that it had experienced a data breach of 143 million customer accounts. Multimedia Networking, a sector that is mainly made up of NASDAQ listed companies, took the fifth and final spot last week as investors were reallocating away from some of the riskier areas of the markets.

 

Fixed income investments in the US were all positive last week as fixed income traders tried to adjust their positions for Hurricane Irma:

 

Fixed Income Change
Long (20+ years) 1.78%
Middle (7-10 years) 0.82%
Short (less than 1 year) 0.04%
TIPS 0.96%

Global currency trading volume was below average last week with the US holiday on Monday. Overall, the US dollar decreased 1.58 percent against a basket of international currencies, giving the dollar one of the worst weeks of performance that we have seen in a significant amount of time. The best performing of the global currencies last week was the Japanese Yen, as it gained 2.2 percent against the value of the US dollar. The worst performance among the global currencies was the Ukrainian Hryvnia, which declined 1.0 percent against the US dollar as Russian military exercises starting this week are causing great concerns in the area.

Commodities were mixed last week as soft commodities led the way higher:

Metals Change Commodities Change
Gold 1.52% Oil 0.62%
Silver 1.73% Livestock 2.27%
Copper -2.95% Grains 0.59%
Agriculture 1.34%

The overall Goldman Sachs Commodity Index increased 0.07 percent last week. Oil advanced 0.62 percent last week as traders adjusted their holdings following Hurricane Harvey and before Hurricane Irma made landfall. Metals were mixed last week with Gold and Silver advancing 1.52 and 1.73 percent, respectively, while Copper bucked the trend and moved lower by 2.95 percent. It was interesting that Gold managed to keep pushing higher last week as the precious metal closed the week at levels not seen since early 2014. Soft commodities were positive last week with Livestock, grains and Agriculture posting gains of 2.27, 0.59 and 1.34 percent, respectively. As mentioned earlier, Orange Juice concentrate saw the largest move of any of the commodities last week, as it gained nearly 13 percent thanks to Hurricane Irma looking like it could devastate the orange crop in southern Florida.

Top 2 Indexes Country Change Bottom 2 Indexes Country Change
RTS Index Russia 1.73% IPC All-Share Mexico -1.95%
Sao Paulo Bovespa Brazil 1.61% Nikkei 225 Japan -2.12%

Last week was a difficult week for the global stock indexes, with only 28 percent of the global markets posting gains. The best performing index last week was found in Russia for the second week in a row, with the RTS index posting a gain of 1.73 percent for the week. Russia once again largely stayed out of the US news cycle last week and it seems that when it does, its stock market does much better than when it is in the US media’s cross hairs. The worst performing index last week was found in Japan and was the Nikkei 225 Index, which turned in a loss of 2.12 percent for the week.

The see-saw effect on the VIX continued to play out last week as the VIX gained nearly 20 percent after falling more than 10 percent two weeks ago. While we may not be seeing normal volatility in the overall financial markets in terms of percentage gains and declines, we are certainly seeing the indecision of the VIX as it jumps around more than it had a few months ago. At this point, the VIX is actually very close to the average level that we have seen over the course of the past year. The current reading of 12.12 implies that a move of 3.50 percent is likely to occur over the next 30 days. As always, the direction of the move over the next 30 days is unknown.

Economic Release Calendar:

 

Last week was a very slow week for economic news releases with the Labor Day holiday weekend in the US, with no releases coming in significantly above or below expectations:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Slightly Positive 9/6/2017 ISM Services August 2017 57.5 55.3
Neutral 9/7/2017 Consumer Credit July 2017 $18.5B $15.1B

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

 

On Wednesday, the services side of the ISM index for the month of August was released and came in slightly better than expected as the services sector continues to show resilience with the US economy continuing to move forward at a very close pace. The economic news released wrapped up on Thursday last week with the release of the consumer credit increase for the month of July, which came in above expectations at more than $18 billion during the month, but this release was largely ignored by the markets as everyone was watching Hurricane Irma move through the Caribbean.

 

This week is business as usual for many Americans as most people get back to a full work week. The releases with the greatest potential to impact the markets are highlighted in green below:

 

Date Release Release Range Market Expectation
9/13/2017 PPI August 2017 0.30%
9/13/2017 Core PPI August 2017 0.20%
9/14/2017 CPI August 2017 0.30%
9/14/2017 Core CPI August 2017 0.20%
9/15/2017 Retail Sales August 2017 0.10%
9/15/2017 Retail Sales ex-auto August 2017 0.50%
9/15/2017 Empire Manufacturing September 2017 20
9/15/2017 University of Michigan Consumer Sentiment Index September 2017 95.5

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

 

This week the economic news releases start on Wednesday with the release of the Producer Price Index (PPI) for the month of August, which is expected to show a gain of 0.3 (overall PPI) and 0.2 percent (core PPI). Both figures are low when compared to where the Fed would like to see them as we continue to see well below target levels of inflation in the US economy. On Thursday, the Consumer Price Index (CPI), both overall and core, for the month of August will be released. Expectations are for the exact same figures as the PPI released on Wednesday with overall CPI increasing 0.3 percent and core CPI increasing 0.2 percent. These figures are the final data points that go into the Fed’s model about future movements of the Fed funds rate prior to the FOMC meeting next week, so the markets may pay more attention to these releases than normal. On Friday, retail sales for the month of August are being released with a very small increase of 0.1 percent overall being expected. Retail sales excluding auto sales are expected to be slightly better at 0.5 percent growth. Retail sales for the month of September will likely be adversely impacted by the hurricanes, so it is important that the market sees a good print on these August releases. Later during the day on Friday, the first of the manufacturing related data points for the month of September is released, the Empire manufacturing index. Expectations are that there will be a decline from the 25 level seen in August, but that the index will still post a reading of 20, which means a rapid expansion in manufacturing took place during the month. Wrapping up the economic news releases this week is the release of the University of Michigan’s Consumer Sentiment index for the month of September (end of August data). Expectations on this data point are for little change from the level seen at the mid-August reading as consumer confidence remains high despite the sluggishness of the US economy.

 

Interesting Fact — The European Communities Act of 1972

 

While it may sound trivial for the British Parliament to convert the existing EU laws into UK law in order to have no gap in the laws come Brexit day, with the intent to “amend, repeal and improve” the laws as necessary, it is actually much more cumbersome than one would think. The European Communities Act of 1972 was a compilation of laws built out of many different legal actions that included, but are not limited to:

 

Good luck sifting through all of that!

 

Source: Europa.eu

For a PDF version of the below commentary please click here Weekly Letter 9-5-2017

Commentary quick take:

 

  • Major developments:
    • Hurricane Harvey impact
    • Slow summer trading week
    • Q2 earnings season complete

 

  • US:
    • Hurricane Harvey is the most expensive storm to hit the US ever
    • Congress is back in session this week
    • Q2 earnings growth rate is currently 10.3 percent
    • Q3 earnings growth rate is expected to be 4.9 percent

 

  • Global:
    • North Korea keeps testing
    • Brexit negotiations have a long way to go

 

  • Technical market view:
    • US markets were positive
    • NASDAQ breaks out to the upside
    • VIX tumbled back down near the bottom

 

  • Hybrid investments strategy update:
    • One sale
    • One purchase
    • Defensively positioned

 

  • This week for the markets:
    • First week back for Congress
    • North Korea
    • Another hurricane is coming

 

  • Interesting Fact: That is a whole lot of water!

 

Major theme of the markets last week: Uncertainty

There was a lot more going on last week in the markets than meets the eye if one looks at the performance charts of the markets. Uncertainty crept back into the markets, particularly as Congress is officially back in session this week with a to-do list that keeps growing. The markets have seemed very lackadaisical toward Congress reconvening this week and the amount of work that needs to be expeditiously done. The main items on the docket are as follows:

 

  1. Hurricane Harvey relief aid package
  2. Debt Ceiling needs raising
  3. Budget for 2018
  4. Corporate Tax reform
  5. Individual Tax reform
  6. Mexico Wall funding fight
  7. Potentially more hurricane relief funding

 

The first three items need to be addressed by the end of September, with items 4 through 6 potentially being tied in with items 1 through 3. With people legitimately in need following hurricane Harvey, it seems item 1 will likely get bipartisan support, although funding for the relief aid is uncertain; remember that President Trump’s budget proposal included a major cut to FEMA. The debt ceiling is a political football that always comes down to the wire when it is going to be hit, with both sides wanting to add pieces of legislation to the bill since it is highly likely that, in the end, it will be passed. If it is not passed by the end of the month, the US will be at risk of being unable to make all debt payments that are outstanding at the start of October. The budget for the government for 2018 will at best be a continuing resolution (CR) and at worst will not be completed or will be vetoed by President Trump. President Trump has said in the recent past that he will veto a budget bill that does not include $1.6 billion in funding for a wall along the Mexican border of the US, a wall he claimed Mexico would pay for during his campaign. Those are the high priority items, but the US financial markets, while certainly concerned about the first three items, are more concerned about tax reform as this will give the largest boost to corporate profits in the coming quarters should corporate tax reform be enacted. While there is a “plan” in the works, the details have conveniently been left out, if they even exist at all, on both corporate and individual tax reform issues. Congress has a tall order to get all of this done, especially with the divisions currently in place between and within the two parties; it seems unlikely everything will get done in time. This uncertainty comes at a time when a showdown with North Korea and the odds of a nuclear-tipped missile being launched are at the highest levels in the last 50 years, by some expert opinions.

 

US news impacting the financial markets:

 

Aside from Hurricane Harvey, last week saw very little news in the US that impacted the US financial markets. Hurricane Harvey wreaked havoc in and around Houston last week, making landfall twice after spinning back out to the Gulf and coming ashore near the Texas-Louisiana border. Some of the largest rain fall amounts ever recorded in the continental US for a single storm were recorded near Houston, with more than 50 inches of rain falling. Despite all the rainfall and flooding, the loss of life thus far has been minimal and the disaster recovery process seems to be greatly improved from the last major natural disaster hitting the gulf coast—Hurricane Katrina. The biggest disruptions from the storm were seen in the US gasoline markets, which saw prices on average increase about $0.25 before and immediately following the hurricane. This increase in gasoline prices, however, happened to coincide with the Labor Day Holiday weekend, which has historically seen gasoline prices increase for the end of summer driving weekend. The medium and longer-term ramifications from Hurricane Harvey are yet to be seen. Some economists are calling the storm the costliest storm to ever hit the US, with recovery and repair costs by some estimates landing in the $150 billion range. In an interesting twist, super storms like Harvey boost long-term GDP in the overall US, as rebuilding adds to GDP, while the disruption from the storms are typically short lived. Construction workers are hired to rebuild infrastructure and damaged homes that need repair and insurance companies are busy day and night for months. However, there is a catch pertaining to the insurance money; as many as 80 percent of the flooded-out homes in the greater Houston area may not have any flood insurance since they were outside of the 100-year flood plain, in which flood insurance is required. Harvey is estimated to be a 1,000-year flood, which will likely leave residents even more reliant on the government to help with the rebuilding costs. Funding for such disaster recovery efforts will certainly be a point of contention among politicians in Congress now that they are getting back to work following their month-long summer recess. As the remnants of Hurricane Harvey ended late last week, so too did the second quarter earnings season for US companies.

 

We are at the finish line for second quarter 2017 earnings as we have now seen 99.6 percent of the companies report 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:

 

Best Buy 10% Dollar General 1% H&R Block 2%
Campbell Soup -5% The Hain Celestial Group 8%

 

Last week, the above table was largely positive, except for Campbell Soup, which posted disappointing earnings and warned of potential compressing margins as Amazon moved into the retail grocery business after closing the deal to buy Whole Foods on Monday of last week. Best Buy saw some of the strongest earnings it has seen in many quarters during the second quarter of 2017 as foot traffic and online purchases came in better than expected. The stock, however, declined by more than 7 percent on the announcement of the results, thanks to a comment from the CEO on the earnings conference call later during the day. On the conference call, the CEO essentially called the revenue and earnings numbers that were posted by Best Buy a fluke and not something investors should be used to seeing. He then went on to discuss the headwinds the company is seeing in the retail sector, in large part due to online sales competition.

 

According to Factset (some of the numbers below changed from last week because of differences in how Factset and Reuters calculate their figures), we have seen 498 (99.6 percent) of the S&P 500 companies release their results for the second quarter of 2017. Of the 498 companies that have released earnings, 73 percent have beaten earnings estimates, while 9 percent have met expectations and 18 percent have fallen short of expectations. When looking at revenue, of the companies that have reported, 70 percent of the companies have beaten estimates, while 30 percent have fallen short. The overall earnings growth rate for the S&P 500 thus far stands at 10.3 percent, with Healthcare and Information Technology being the top performing sectors in terms of the percentage of companies in the sector that have reported earnings beating expectations. Now that the figures from the quarter are essentially final, it makes sense to compare them to historical figures from past quarters. When looking at earnings and the percentage of companies beating earnings, the second quarter of 2017 is well above the average level that we have seen over the past five years and over the past one year. When looking at percentage of companies beating revenues expectations, the second quarter results are also well above the five-year average and the one-year average. One strange phenomenon that was persistent in the numbers throughout the quarter and seen in last week’s results was the penchant for the market to punish stocks that beat earnings and revenue expectations. On average for this reporting period, a company had a price decrease of 0.3 percent when looking at the time period of two days before and two days following an earnings announcement. This is backwards from how the market normally reacts and is causing some confusion about what could be coming in the next few quarters for corporate America. Now that the second quarter earnings reporting season is fully over, we are less than six weeks from starting the third quarter earnings reporting season, during which Factset is calculating expected earnings growth of 4.9 percent.

 

Global news impacting the markets:

 

There were two main topics that made the international news last week that had an impact on the global markets. The first was the launching of an ICBM by North Korea over Japan, landing it in the Pacific Ocean. This move was immediately called out by all members of the UN and denounced by many world leaders as unhelpful in the ongoing standoff between North Korea and almost all other countries. This launch, however, was only the first of two provocative acts by North Korea over the past week as the country detonated a supposed Hydrogen Bomb underground on Sunday. The explosion was much larger than its previous nuclear weapons test, which happened in September of 2016. The explosion was also at least 5 times more powerful than the last atomic bomb the US dropped on Japan at the end of WW2. As US ambassador to the UN Nikki Haley said at Monday’s emergency UN security council meeting, North Korea Leader Kim Jong Un is begging for a war at this point and there are limited diplomatic solutions to try to end the current standoff peacefully. From a military standpoint over the extended weekend, several top generals and members of the White House said North Korea is moving closer to war with every provocative action and that an armed conflict with the US will end in the annihilation of North Korea. Even China, who has historically been the country that has kept the peace between North Korea and other countries, is starting to get fed up with North Korea’s actions and seems willing, at least currently, to back a full blockade of trade with North Korea. This would be very bad for North Korea as China provides the country with most of its monetary supply as China buys a lot of North Korea’s natural resources, including oil and timber. The situation seems to quickly be coming to a head and, at this point, is susceptible to either side making a misstep that could have long lasting consequences in the region. The other major storyline last week in the global news that impacted the financial markets came out of the UK.

 

The ongoing saga of the Brexit negotiations has once again started to make headlines as there are specific deadlines for some of the negotiations to show good progress in order for the EU to continue negotiating. One deadline is in October and deals with the divorce settlement the UK must pay to the EU. This must be agreed to prior to the EU allowing any discussions on future trade agreements and it is a major area of contention between the two sides. On Sunday, the Times news organization in London published an article saying that Prime Minister Theresa May has agreed to pay a £50 billion divorce payment to Brussels to get the Brexit negotiations surrounding trade and other very important items to move ahead. Of course, the government in the UK denied any such agreement, as did the EU, but the article even noted that she was debating the timing of the announcement to Parliament. However, the £50 billion that PM May could have agreed to is only half of the amount the EU was originally seeking, so there is obviously still some distance between the two sides.

 

Technical market review:

 

No changes were made over the course of the previous week in the technical charts drawn below. The green lines remain the daily index movements, while the yellow lines are the trading ranges that have been drawn based on the index movements of the past several weeks. The red line on the VIX chart remains the 52-week average level of the VIX.

We are back to seeing all three of the major US indexes above their most recent trading ranges, while the VIX has managed to drop all the way back down to the pre-spike levels seen at the end of July. The NASDAQ (lower left pane above) managed to overtake the Dow (upper right pane above) for the top spot in terms of technical strength last week, thanks almost entirely to the outsized increase seen in biotechnology stocks. The NASDAQ is the strongest because the index is both above its most recent trading range and has managed to make a new high above the level seen back in the middle of July. The S&P 500 (upper left pane above) is currently in second place as it overtook the upper edge of its trading range and is closer to making a new all-time high than the Dow. The Dow, with its relatively slight increase when compared to the S&P 500 and the NASDAQ, last week turned in a solid week of gains, but didn’t manage to increase at all in technical strength. The VIX (lower right pane above), as mentioned above, moved down last week to levels not seen since the middle of July when the index was touching all time low levels. While the VIX is currently pointing toward smooth sailing, all of that smoothness being seen by the VIX can be gone in a very short period of time.

 

Hybrid model performance and update

For the trading week ending on 9/1/2017, returns in the hybrid and quant hypothetical models* (net of a 1% annual management fee) were as follows:

 

Last Week 2017 YTD Since 6/30/2015
Aggressive Model 0.35% 5.91% 11.64%
Aggressive Benchmark 0.93% 12.37% 12.16%
Growth Model 0.34% 5.57% 10.36%
Growth Benchmark 0.73% 9.62% 9.78%
Moderate Model 0.24% 4.63% 8.46%
Moderate Benchmark 0.53% 6.93% 7.32%
Income Model 0.21% 4.25% 7.87%
Income Benchmark 0.27% 3.64% 4.13%
Quant Model 0.64% 13.05%
S&P 500 1.37% 10.62% 20.04%

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

 

There were two changes in the hybrid models over the course of the previous week. The first change was that General Mills (GIS) was sold, after having broken down for the past two quarters and not showing the needed amount of improvement in the latest earnings and company released information. General Mills was a long-term hold for the hybrid models with a 40 percent gain being booked on the stocks for investors who have held it since it was first purchased in the models. Proceeds from the sale of GIS went into cash.

 

The second change in the hybrid models last week was the addition of a new stock holding, Republic Services Group (RSG). RSG is in the waste management and recycling business across much of the US. The company operates in 39 states and Puerto Rico and operates 333 different collection operations. The company also operates a business division that runs 71 different landfill gas and renewable energy projects. From a financial standpoint, the company has a very solid set of financials, while generating about $2.5 billion in revenues on a quarterly basis. The company also pays a solid dividend of 2.1 percent and recently announced that it is increasing its dividend by 8 percent. From an overall model perspective, the two changes made last week lower the overall dependence of the individual stock holdings on consumer goods and adds to consumer services, which prior to RSG had almost no direct weighting in the hybrid models. This hurricane season, which is shaping up to be an active one for major storms that make landfall in the US, will provide a tail wind for RSG and others in the waste management industries as there will be many months of cleaning up ahead.

 

Overall, the hybrid models are currently allocated in a conservative manner as finding investments that do not look very overpriced has become difficult. From a tactical perspective, the hybrid models are all holding extra cash, hedging positions and short term bond funds across the board to help protect against any downside movement that may be coming in the markets.

 

Market Statistics:

 

The US markets were up last week as volume remained below average, as expected:

 

Index Change Volume
NASDAQ 2.71% Below Average
S&P 500 1.37% Below Average
Dow 0.80% Below Average

 

Last week was a risk-on trading week, prompted by a crazy move in the NASDAQ (more on that move below in the sector analysis). Volume, however, did not match the enthusiasm of the markets last week as it was a lackluster week on all three indexes, even though the NASDAQ bolted higher by more than 2.7 percent. Now that we are in the after Labor Day trading time of year, we should start to see volume pick back up toward average levels over the next few weeks.

 

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

 

Top 5 Sectors Change Bottom 5 Sectors Change
Biotechnology 7.97% Financials -0.31%
Semiconductors 4.63% Utilities -0.54%
Pharmaceuticals 3.48% Telecommunications -0.66%
Healthcare 3.20% Regional Banks -0.67%
Oil & Gas Exploration 2.74% Insurance -1.21%

 

Biotechnologies had an amazing move last week thanks to a single transaction. Over the weekend last week, it was announced that Gilead was going to purchase Kite Pharmaceuticals. Kite increased by nearly 30 percent for the week and Gilead didn’t trade down like a company normally does when it announces it is buying another company. Rather, Gilead increased by more than 13 percent for the week. Two other large movers in the biotechnology space last week were June Therapeutics and Bluebird Bio, both of which increased more than 33 percent for the week on speculation about potential buyouts as well as breakthroughs in cancer treatments. It was a very wild week for the Biotechnology sector. The drastic increase in Biotechnology had knock-on effects in both Healthcare and Pharmaceuticals, both of which were among the top five performing sectors last week. Semiconductors took second place last week as investors cheered the next generation processing chips that were announced by Intel and AMD. Oil and Gas Exploration rounded out the top five performing sectors last week as Hurricane Harvey had less of an adverse impact on the sector than was initially thought.

 

Keeping with the Hurricane Harvey theme, on the flip side in negative performance last week was the Insurance sector leading the way lower, thanks to the unknown and drastically increasing cost estimates of Harvey. Regional Banking and Financials overall made the bottom five performing sectors as investors continue to struggle with what the Fed will likely do next considering the new economic data that was released. Telecommunications and Utilities both pushed lower as investors were moving from safe haven assets toward more risky assets in the risk-on trade last week.

 

Fixed income investments in the US were mixed last week as fixed income traders sold both the long-end and short-end of the curve and bought the middle:

 

Fixed Income Change
Long (20+ years) -0.24%
Middle (7-10 years) 0.10%
Short (less than 1 year) -0.01%
TIPS 0.23%

Global currency trading volume was below average last week with most of Europe still on holiday and with US traders focusing on Hurricane Harvey. Overall, the US dollar increased 0.38 percent against a basket of international currencies. The best performing of the global currencies last week was the Russian Ruble, as it gained 1.9 percent against the value of the US dollar with the media spotlight having better things to focus on than the ongoing probes into Russia and President Trump. The worst performance among the global currencies was the Venezuelan Bolivar, which declined 1.4 percent against the US dollar as President Maduro still remains in power.

Commodities were mixed last week as metals gained while many of the other commodities pushed lower:

Metals Change Commodities Change
Gold 2.70% Oil -0.82%
Silver 3.85% Livestock -2.57%
Copper 2.21% Grains 0.79%
Agriculture -0.27%

The overall Goldman Sachs Commodity Index increased 2.04 percent last week, driven by the movement in the metal commodities. Oil declined 0.82 percent last week as traders adjusted their holdings for the aftermath of Hurricane Harvey. Metals were all positive last week for the second week in a row with Gold, Silver and Copper advancing 2.7, 3.85 and 2.21 percent, respectively. Most of the gains in the metals came on Thursday last week as Gold hit a multiple month high on strong demand. Soft commodities were mixed last week with Livestock and Agriculture posting declines of 2.57, 0.27 percent, respectively, while Grains bucked the trend and increased by 0.79 percent.

Top 2 Indexes Country Change Bottom 2 Indexes Country Change
RTS Index Russia 3.78% Kospi South Korea -0.88%
SET Thailand 2.70% PX 50 Czech Republic -1.41%

Last week was a mixed week for the global stock indexes, with 67 percent of the global markets posting gains. The best performing index last week was found in Russia, with the RTS index posting a gain of 3.78 percent for the week. As mentioned above, much of this gain in Russia last week can be attributed to the fact that Russia largely stayed out of the negative spotlight of the US news cycle as there were more critical issues to report. The worst performing index last week was found in the Czech Republic and was the PX 50 Index, which turned in a loss of 1.41 percent for the week. South Korea made it on the list of negative performance last week, posting the second worst decline as fears of conflict on the Korean peninsula are growing.

After falling more than 19 percent two weeks ago, the VIX followed up the decline last week by declining another 10 percent.  In total at this point, the VIX spikes of the past month have all but evaporated, leaving the index within striking distance of the lowest point that has ever been seen. This abnormally low level of volatility, as measured by the VIX, still seems crazy as there are many potential issues coming for the markets over the next 30 days. The current reading of 10.13 implies that a move of 2.92 percent is likely to occur over the next 30 days. As always, the direction of the move over the next 30 days is unknown.

Economic Release Calendar:

 

Last week was a very busy week leading up to the Labor Day holiday weekend in the US, with several releases that came in significantly different than expected:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Neutral 8/29/2017 Case-Shiller 20-city Index June 2017 5.70% 5.70%
Positive 8/29/2017 Consumer Confidence August 2017 122.9 120.3
Positive 8/30/2017 ADP Employment Change August 2017 237K 180K
Positive 8/30/2017 GDP – Second Estimate Q2 2017 3.00% 2.70%
Neutral 8/31/2017 Personal Income July 2017 0.40% 0.30%
Slightly Negative 8/31/2017 Personal Spending July 2017 0.30% 0.40%
Neutral 8/31/2017 PCE Prices July 2017 0.10% 0.10%
Neutral 8/31/2017 PCE Prices – Core July 2017 0.10% 0.10%
Neutral 8/31/2017 Chicago PMI August 2017 58.9 58.9
Slightly Negative 9/1/2017 Nonfarm Payrolls August 2017 156K 183K
Slightly Negative 9/1/2017 Nonfarm Private Payrolls August 2017 165K 173K
Slightly Negative 9/1/2017 Unemployment Rate August 2017 4.40% 4.30%
Negative 9/1/2017 Average Hourly Earnings August 2017 0.10% 0.20%
Slightly Positive 9/1/2017 ISM Index August 2017 58.8 56.8
Neutral 9/1/2017 University of Michigan Consumer Sentiment Index August 2017 96.8 97.1

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

 

Last week, the economic news releases started on Tuesday with the release of the Case-Shiller 20-city Home Price index, which, as expected, showed a gain of 5.7 percent on a year-over-year basis for the US housing market through June of 2017, causing no noticeable movement in the housing related stocks on Tuesday. Later on Tuesday, the Consumer Confidence index for the month of August was released and came in at the second highest level seen so far in 2017. On Wednesday, the first of the employment related releases for the week was released, that being the ADP Employment change figure for the month of August, which reported 237,000 new jobs created during August, a reading that was 57,000 jobs higher than anticipated. Later during the day on Wednesday, the second estimate of Q2 2017 GDP was released and it too exceeded expectations, posting a 3.0 percent reading while the markets had been expecting a reading of 2.7 percent. The market reaction to the increased GDP figure was somewhat muted as economists were discussing the negative impacts of Hurricane Harvey on future short-term GDP numbers, while overlooking the positive surprise on the GDP print. There were a large number of releases on Thursday as it was the last day of August, with most of the releases coming in very close to market expectations. The only release that came in even slightly different from expectations was personal spending, which came in one tenth of a percent below expectations, posting growth of 0.3 percent rather than the expected 0.4 percent. This release is significant since slow personal spending has more weight in determining how consumers feel about the health of the economy than the sky-high confidence figures currently being shown. US consumers are currently very confident, but not confident enough to increase spending, which is a very interesting catch 22 scenario. On Friday, the focus of the economic news releases was the US labor market. The overall unemployment rate for the month of August was shown to have increased to 4.4 percent from 4.3 percent. Payroll figures came in weaker than expected with both nonfarm public and private payroll numbers coming in below 170,000. The labor force participation rate held steady at 62.9 for the month of August. Average hourly earnings increased by only one tenth of a percent during August, which was half of what was expected. Overall, the labor force figures that were released on Friday, being as uninspiring as they were, increased the likelihood of a Fed rate hike soon. The labor market reversing course and not improving helped strengthen the Fed’s hand at raising rates. Lost in the employment data on Friday was the release of the overall ISM index as well as the latest consumer sentiment index reading from the University of Michigan. The overall ISM index posted a better than expected reading, thanks to an increase in orders during the month of August, while the consumer sentiment index posted an in-line with expectations reading and had little impact on the overall markets. It was interesting to see that the enthusiasm shown in the government’s reading of consumer confidence did not come through in the University of Michigan’s reading.

 

This week is the unofficial back-to-work week for many people on Wall Street following the Labor Day holiday. It is also the back-to-work week for Congress, but there are only two economic news releases that have the slightest chance of impacting the overall markets. The release with the greatest potential to impact the markets is highlighted in green below:

 

Date Release Release Range Market Expectation
9/6/2017 ISM Services August 2017 55.3
9/7/2017 Consumer Credit July 2017 $15.1B

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

 

On Wednesday, the services side of the ISM index for the month of August is set to be released and, much like the overall ISM index released last week, this release is expected to show a slight increase during August when compared to the reading from July. The markets could react to this release, but only if it comes in drastically different than is expected, which is unlikely. The economic news releases wrap up this week on Thursday with the release of the consumer credit increase for the month of July, which is expected to show an increase of about $15 billion during the month. This release is very stale and the markets will largely ignore it, as is typical. While the week is lacking economic news releases, it is certainly not lacking Fed officials speaking as there are 7 speeches to be given this week, all of which will be closely watched by the markets for any clues as to what the Fed is thinking about its upcoming FOMC meeting, which will take place on September 19th and 20th.  One topic that will be watched particularly closely will be any discussion about the labor market in the US after the uptick in unemployment seen in last week’s economic news releases.

 

Interesting Fact — Hurricane Harvey

 

With Hurricane Harvey being front and center in the news all last week, it only seemed right to have an interesting fact about the storm this week. While the numbers are impossible to calculate with precision, according to Meteorologist Ryan Maue with the Capital Weather Gang, about 33 trillion gallons of rain fell on Texas last week during Hurricane Harvey. What would 33 trillion gallons of water look like if it was fit into a cube? The cube would be 3.1 miles long on each side, which is equivalent to the distance between Mile High Stadium and City Park in Denver.

 

Source: Washington Post

For a PDF version of the below commentary please click here Weekly Letter 8-28-2017

Commentary quick take:

 

  • Major developments:
    • Slow summer trading week
    • Earnings season pushed over 98 percent
    • Jackson Hole Economic Policy Symposium

 

  • US:
    • Fed Chair Yellen’s speech
    • Is the end near for Chair Yellen?
    • Q2 earnings growth rate is currently 12.1 percent
    • Hurricane Harvey came ashore

 

  • Global:
    • Slow week around the world
    • North Korea tested the US
    • Brexit negotiations remain stalled

 

  • Technical market view:
    • US markets were positive
    • Two indexes remained in their trading ranges
    • VIX moved below its one-year average

 

  • Hybrid investments strategy update:
    • No changes to the hybrid models last week
    • SJM Q2 2017 earnings

 

  • This week for the markets:
    • Aftermath of Hurricane Harvey
    • Potential tax code reform details
    • Debt ceiling fight is heating up

 

  • Interesting Fact: Intel’s new computer chip

 

Major theme of the markets last week: Jackson Hole Economic Policy Symposium

Amid slow summer trading, the global financial markets last week had one focus—Jackson Hole, Wyoming. One of the least populated states in the US, Wyoming may seem like an odd location for the world’s most influential central banks to assemble for a meeting, but in late August for the past 39 years, the Kansas City Federal Reserve has hosted an Economic Policy Symposium in Jackson Hole. Central bankers from around the world came to discuss relevant, pressing topics, but unlike some previous years, there were no revolutionary speeches or policy break through announced. Markets around the world were hoping to get some clarity about upcoming central bank policies, but they were largely let down by the speeches and working papers presented. The lack of reaction to the meeting could have also been the timing of the key speeches, namely those by US Fed Chair Janet Yellen and ECB President Draghi, both of which occurred after all but the US markets had closed for the weekend on Friday.

 

US news impacting the financial markets:

 

As mentioned above, there were very few topics that had a notable impact on the markets last week, with the main topic of interest being the Jackson Hole Economic Policy Symposium. Fed Chair Janet Yellen gave a keynote address on Friday, as the US Fed chairperson typically does. The markets were thinking she would use the speech to outline upcoming Fed decisions, such as when to start shrinking the balance sheet and when the next Fed rate hike could occur. However, she threw a curve ball to the markets, spending nearly all of her speech talking about the need for the financial industry regulations that have evolved from the depths of the Great Recession. This deviation from market expectations suggests this will likely be Chair Yellen’s last time going to the Jackson Hole meeting as the Fed Chairwoman. There had been rumors ever since the campaign trail that President Trump was not happy with the action the Fed was taking under Chair Yellen’s leadership and that he would likely not reappoint her when her term expires early next year. With this speech that flies in the face of the administration and many Republican members of Congress, she essentially closed the door on any consideration of her being reappointed to her current position. While the markets didn’t react to anything in her speech, we did see a little reaction to the increased chance that Gary Cohn will be the next Fed chair. However, Gary Cohn is not a shoe-in for the position at the Fed as he is very unhappy with President Trump’s handling of the situation in Charlottesville and even went as far as drafting a letter of resignation from his post as an economic advisor to the President. Democrats are quick to point out that Cohn is not qualified to be the top central banker in the world as he only has experience from running Goldman Sachs, at which his focused was on financial markets and not on monetary policy. CNBC reported that the last Fed chair who was new at monetary policy was William Miller, who was appointed by Jimmy Carter and lasted for a little more than 1 year, during which nothing went very well for the Fed. Last week was also a slow week for earnings reports as we are now very close to the conclusion of the reporting season.

 

The finish line for second quarter 2017 earnings is now upon us as we are 98 percent of the way complete with reporting. 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:

 

Big Lots 8% Guess? 90% Sanderson Farms 37%
Burlington Stores 44% HP 2% JM Smucker -6%
Cree 144% Intuit 433% Splunk pushed
Salesforce.com 267% Lowe’s -3% Tiffany & Co 5%
Dollar Tree 14% Medtronic 4% Toll Brothers 28%
DSW 31% Michaels 19% Williams-Sonoma 3%

 

Last week was largely a positive week for the companies that reported earnings as there were only two companies in the above table that missed expectations. Both higher end retailers, such as Guess?, Tiffany & Co and Williams-Sonoma; and discount retailers, such as Dollar Tree, Burlington Stores and DSW; all beat market expectations. Intuit, maker of TurboTax and QuickBooks, posted a very strong quarter with its cloud offerings really starting to pick up; the company beat expectations by more than 400 percent. Remember that expectations were very low, so it didn’t take much to result in a huge surprise number.

 

According to Thomson Reuters, we have seen 491 (98 percent) of the S&P 500 companies release their results for the second quarter of 2017. Of the 474 companies that have released earnings, 74 percent have beaten earnings estimates, while 9 percent have met expectations and 18 percent have fallen short of expectations. When looking at revenue, of the companies that have reported, 69 percent of the companies have beaten estimates, while 31 percent have fallen short. The overall earnings growth rate for the S&P 500 thus far stands at 12.1 percent, with Healthcare and Information Technology being the top performing sectors in terms of the percentage of companies in the sector that have reported earnings beating expectations. With only two percent of the S&P 500 still needing to report, it is almost mathematically impossible for the above figures to change this late in the game.

 

This last week of reported earnings is made up entirely of business-to-consumer products companies. This is the last week an upcoming table of companies to announce earnings will be shown in commentary until we start the third quarter earnings season.  The table below shows the companies that have the greatest potential to move the markets highlighted in green:

 

Best Buy Dollar General H&R Block
Campbell Soup The Hain Celestial Group

 

Best Buy could move on earnings this week, but it seems the risk of the movement is to the downside as the company continues to struggle with online competition. Campbell Soup, being a consumer staples company, could post a difficult quarter this week after difficulties have been seen among other consumer staple companies over the course of the past few weeks.

 

Other US news impacting the financial markets last week was hurricane Harvey. Hurricane Harvey hit Texas late last week and is still causing a large amount of flooding in southern Texas. The most immediate impact on the financial markets last week was seen in the gasoline and oil markets as production had to be stopped at several off-shore oil rigs and refinery facilities on land needed to be turned off as well. The impact of the storm on the energy sector in the US is unknown, but it could have a material negative impact on the overall US economy if business disruption resulting from the flooding continues for an extended period.

 

Global news impacting the markets:

 

Globally, markets were little changed last week as investors around the world were hopeful for meaningful information coming out of Jackson Hole. Ultimately, many investors felt let down by the outcome of the meeting. Excluding the US markets, most of the foreign markets were within half a percent of zero in terms of performance last week. Earnings at a few of the large blue-chip companies in China helped boost the Shanghai index up near 3,300, which is a level the index has had a very difficult time breaking through in the past.

 

The looming Brexit negotiations made a few headlines last week, but the headlines largely continued to outline the uncertainty over how much the EU will be asking the UK to pay in their divorce settlement. This has really become a sticking point for the negotiations with the EU saying it cannot proceed into any further negotiations until payment arrangements have been made. The UK, for its part, would like to move on to bigger items, but seems stuck by the EU’s unwillingness to move past the financial breakup fees. With so much time remaining until the two-year clock officially runs out, the financial markets around the world are unlikely to react to any news that comes out about the negotiations over the next several quarters. Even when we get down to within 6 months of the Hard Exit date, it seems unlikely the markets will react out of hope that the situation is rectified at the last possible minute.

 

North Korea made a headline or two over the weekend after it was announced that the country launched three very short-range missiles in defiance of the ongoing military exercises taking place in South Korea between the US and several allies. The US said it was almost immediately clear that there was no threat from the missile launches as one of the missiles blew up seconds after takeoff and the other two spun out of control in the middle of their short flights. These uncontrolled mistakes raise the question of what should happen if North Korea launches something that mistakenly hits Japan or South Korea. With war seemingly in the balance and leaders from both sides seemingly unwilling to back down, the situation seems to be intensifying. This latest round of missile launches seems to be nothing more than a test of the nerves of the US military.

 

Technical market review:

 

No changes were made over the course of the previous week in the technical charts drawn below. The green lines remain the daily index movements, while the yellow lines are the trading ranges that have been drawn based on the index movements of the past several weeks. The red line on the VIX chart remains the 52-week average level of the VIX.

The Dow (upper right pane above) remained in the top spot in terms of technical strength. Both the S&P 500 (upper left pane above) and the NASDAQ (lower left pane above) remain within their most recent trading ranges, but the S&P is slightly ahead of the NASDAQ, coming in second at the conclusion of the week. The VIX (lower right pane above) saw the most visual movement last week as it came crashing down through the average level of the past year (red horizontal line) at the start of the week. One thing that does appear in the technical charts above is that the US financial markets have generally stalled out since the end of July, moving in a choppy, but largely sideways fashion.

 

Hybrid model performance and update

For the trading week ending on 8/25/2017, returns in the hybrid and quant hypothetical models* (net of a 1% annual management fee) were as follows:

 

Last Week 2017 YTD Since 6/30/2015
Aggressive Model 0.09% 5.54% 11.23%
Aggressive Benchmark 0.84% 11.34% 11.13%
Growth Model 0.00% 5.22% 9.98%
Growth Benchmark 0.65% 8.83% 8.99%
Moderate Model -0.15% 4.38% 8.19%
Moderate Benchmark 0.47% 6.37% 6.76%
Income Model -0.26% 4.03% 7.64%
Income Benchmark 0.25% 3.36% 3.85%
Quant Model 1.31% 12.33%
S&P 500 0.72% 9.12% 18.42%

*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. The week was a difficult week for the most conservative basket of stocks within the models. JM Smucker (SJM) released disappointing earnings on Thursday and was rewarded with its stock declining by almost 10 percent. Declines in coffee volume and increasing private label competition had a larger than expected negative impact on business. SJM held an analyst conference call on the day it posted its results and on the call management acknowledged that the difficulties of the quarter had been expected, but were greater than anticipated. The company is making some structural changes in its business lines to better compete, but I will probably be selling SJM soon when we get a little bounce back in the price as margins seem to be getting pinched with the changes they are pursuing to become more competitive in the evolving retail landscape. The announcement of the closing of the Amazon buyout of Whole Foods also seemed to negatively impact the stock, as well as most stocks in the consumer staples industry. We will have to wait and see just how much of an impact Amazon owning Whole Foods will have on the retail grocery sector. Amazon has tried the grocery industry before and failed miserably; maybe this time will be different.

 

Market Statistics:

 

The US markets were up last week as hope for tax reform once Congress is back in session overshadowed the looming debt ceiling fight:

 

Index Change Volume
NASDAQ 0.79% Below Average
S&P 500 0.72% Below Average
Dow 0.64% Below Average

 

Volume for the week was well below average with some of the lowest volume trading days that we have seen so far in 2017 being recorded last week. This low volume was widely anticipated as last week is historically one of the slowest weeks of the year in terms of trading volume, thanks to vacations and a general lack of information coming out of Washington DC. Volume should remain low this coming week and then slowly start to ramp back up following the Labor Day holiday weekend as many people return from vacation.

 

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

 

Top 5 Sectors Change Bottom 5 Sectors Change
Materials 2.62% Insurance 0.13%
Biotechnology 2.30% Consumer Staples -0.11%
Software 2.30% Medical Devices -0.26%
Real Estate 2.19% Consumer Goods -0.27%
Telecommunications 1.98% Home Construction -0.27%

 

Materials jumped higher last week as increased government spending on construction projects drove up near-term demand for raw materials. Biotechnology and Software took the second and third spots with biotech moving on a few FDA decisions as well as rumors about potential merger and acquisition activities. Real Estate took the fourth spot despite the housing related numbers showing a slowing down in the acceleration of the US housing market. Telecommunications rounded out the top sectors last week with strong performance from a few of the cell phone carriers that are continually adjusting their unlimited data plans to try to lure consumers away from competitors. Home Construction and Consumer Goods were tied for the bottom spot last week. Medical Devices and Consumer Staples rounded out the sectors of the markets that saw negative performance last week, for several different reasons, but earnings were the primary driver of the negative performance. Insurance rounded out the bottom five performing sectors as the industry braces for what will likely be some very large payments coming due because of Hurricane Harvey.

 

Fixed income investments in the US were positive last week as fixed income traders had little additional information to react to during the week:

 

Fixed Income Change
Long (20+ years) 0.55%
Middle (7-10 years) 0.22%
Short (less than 1 year) 0.01%
TIPS 0.10%

Global currency trading volume was below average last week with most of Europe still on holiday. Overall, the US dollar decreased 0.91 percent against a basket of international currencies. The best performing of the global currencies last week was the Venezuelan Bolivar, as it gained 3.2 percent against the value of the US dollar, despite new sanctions being put in place on Venezuela from the US. The worst performance among the global currencies was the Qatari Rial, which declined 1.2 percent against the US dollar because of the political uncertainty surrounding the country being in or out of various trading groups in the Middle East because of its supposed sponsorship of terrorism.

Commodities were mixed last week as metals gained, while all the other commodities pushed lower:

Metals Change Commodities Change
Gold 0.36% Oil -2.21%
Silver 0.06% Livestock -0.79%
Copper 3.72% Grains -1.97%
Agriculture -0.11%

The overall Goldman Sachs Commodity Index declined 0.70 percent last week, driven by the movement in the non-metal commodities. Oil declined 2.21 percent last week as traders tried to adjust their positions for the impact of Hurricane Harvey in the Gulf of Mexico. Metals were positive last week with Gold, Silver and Copper advancing 0.36, 0.06 and 3.72 percent, respectively. Soft commodities were negative last week with Grains, Livestock and Agriculture posting declines of 1.97, 0.79 and 0.11 percent, respectively.

Top 2 Indexes Country Change Bottom 2 Indexes Country Change
Sao Paulo Bovespa Brazil 3.43% AEX Netherlands -0.43%
WIG Poland 3.36% Bel-20 Belgium -0.49%

Last week was a mixed week for the global stock indexes with 62 percent of the global markets posting gains. The best performing index last week was found in Brazil, with the Sao Paulo based Bovespa index posting a gain of 3.43 percent for the week. The worst performing index last week was found in Belgium and was the Bel-20 Index, which turned in a loss of 0.49 percent for the week.

Following two different spikes in the past three weeks, the VIX moved lower last week, declining by almost 19 percent for the week.  Even the intraweek movements of the VIX were relatively tame when compared to the movements of the past three weeks. The VIX seems to be placing the chances of a debt ceiling showdown that closes the US government as very low and anticipating that the credit rating agencies do not act based on the uncertainty around the debate. The VIX remains more than 20 percent above its low point hit back at the end of July. The current reading of 11.57 implies that a move of 3.34 percent is likely to occur over the next 30 days. As always, the direction of the move over the next 30 days is unknown.

Economic Release Calendar:

 

Last week was a very slow week for economic news releases, with only one release that came in significantly different than expected:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Neutral 8/23/2017 New Home Sales July 2017 571K 615K
Neutral 8/24/2017 Existing Home Sales July 2017 5.44M 5.56M
Negative 8/25/2017 Durable Orders July 2017 -6.80% -6.00%
Neutral 8/25/2017 Durable Goods –ex transportation July 2017 0.50% 0.50%

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

 

Last week, the economic news releases started on Wednesday with the release of the New Home sales figure for the month of July, which came in about 8 percent lower than was expected. The Existing Home sales figure for the month of July was released on Thursday and missed expectations, but not by as wide of a margin as the new home sales figure. Overall, these two data points, combined with the other US housing data released over the past three weeks about the month of July, paint a picture of the US housing market starting to cool down ahead of Fall. Friday was the big day of the week for economic news releases as the durable goods orders for the month of July were released, both overall and excluding transportation. Overall orders posted a decline of 6.8 percent, which was worse than the expected 6 percent decline. The decline was nearly all due to a drop in airline orders; when the airline and auto sales were taken out of the equation, durable goods orders increased by 0.5 percent during the month. This growth is very slow, but at least it is not a contraction like the overall orders.

 

This week, leading up to Labor Day week, is packed with economic news releases, with a wide range of releases that could impact the overall movement of the markets. The releases with the greatest potential to impact the markets are highlighted in green below:

 

Date Release Release Range Market Expectation
8/29/2017 Case-Shiller 20-city Index June 2017 5.70%
8/29/2017 Consumer Confidence August 2017 120.3
8/30/2017 ADP Employment Change August 2017 180K
8/30/2017 GDP – Second Estimate Q2 2017 2.70%
8/31/2017 Personal Income July 2017 0.30%
8/31/2017 Personal Spending July 2017 0.40%
8/31/2017 PCE Prices July 2017 0.10%
8/31/2017 PCE Prices – Core July 2017 0.10%
8/31/2017 Chicago PMI August 2017 58.9
9/1/2017 Nonfarm Payrolls August 2017 183K
9/1/2017 Nonfarm Private Payrolls August 2017 173K
9/1/2017 Unemployment Rate August 2017 4.30%
9/1/2017 Average Hourly Earnings August 2017 0.20%
9/1/2017 ISM Index August 2017 56.8

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, which is expected to show a gain of 5.7 percent on a year-over-year basis for the US housing market through June of 2017. This release is so stale that unless it comes in drastically different than expected, the markets will largely ignore the release. Of potentially more interest to the markets on Tuesday will be the release of the Consumer Confidence index for the month of August, which is expected to post a very slight decline over the reading in July. On Wednesday, the first of the employment related releases for the week is set to be released, that being the ADP Employment change figure for the month of August, which is expected to post a middle-of-the-road reading of 180,000 jobs created during the month. Later during the day on Wednesday, the second estimate of Q2 2017 GDP is set to be released with expectations of a one tenth of a percent increase from 2.6 at the first reading to 2.7 percent with this reading. If we see this number turn and move lower, we could see a negative market reaction, but that is unlikely. On the last day of August, personal income and spending are both set to be released with both expected to have improved over the near zero readings seen in June. As is normally the case, consumer spending will be more important to the economy than income. PCE prices are also set to be released on Thursday, as is the Chicago area PMI for the month of August. PCE could see some market reaction if it comes in very different than expected and changes the Fed’s potential thinking on the timing of the next rate hike. On Friday, the focus of the economic news releases will be on the US labor market. The overall unemployment rate for the month of August will be released, in addition to the payroll figures and many other data points related to employment in the US. Overall, the unemployment rate in the US is expected to be unchanged from the July level of 4.3 percent. Payroll figures are expected to be about 25,000 lower than the July figures, which, if it comes to fruition, could negatively impact the markets. The labor force participation rate will also be released on Friday and will likely be closely watched by the markets as it is a key determinant in various aspects of the economy, such as wage growth and overall health of the employment market. In addition to the economic news releases, there are two speeches being given by Fed officials this week that the markets will likely listen to very closely for hints about future Fed policy.

 

Interesting Fact — Computers have come a very long way

 

Last week Intel announced that it is releasing the 8th generation of its Core line that will provide a 40 percent increase in computing power when compared to the 7th generation. The 40 percent increase has been dubbed a “once in a decade increase,” however the boost in speed will quickly be replicated by the end of the year by rival AMD. We have come a very long way in computing power since 1801 when Joseph Jacquard invented a weaving loom that would automatically change a weaving pattern based on changes in wooden punch cards.

 

Source: www.computersciencelab.com

For a PDF version of the below commentary please click here Weekly Letter 8-21-2017

Commentary quick take:

 

  • Major developments:
    • Markets remained on edge
    • Earnings season pushed over 95 percent
    • Racial tensions in the US
    • Meeting minutes from the Fed

 

  • US:
    • President Trump’s bad week
    • Fed July meeting minutes
    • Q2 earnings growth rate is currently 12.1 percent
    • Volatility remained last week

 

  • Global:
    • Terrorist attacks in Spain
    • Slow week everywhere else

 

  • Technical market view:
    • US markets were negative
    • Two indexes remained in trading ranges
    • VIX continued to see increased volatility

 

  • Hybrid investments strategy update:
    • Several changes to the hybrid models last week
    • Performance continues to be strong during market volatility

 

  • This week for the markets:
    • Jackson Hole Economic Summit
    • North Korea

 

  • Interesting Fact: Eclipse market movements

 

Major theme of the markets last week: Low inflation for a long time

The release of the July FOMC meeting minutes was the highlight among market themes last week as the topic of low inflation remains front and center for nearly all central bankers around the world. Over the past few months we have repeatedly heard that low inflation seems to be the new normal around the world and it is very perplexing to central bankers. In the past, very low interest rates combined with a government pushing money into the system had resulted in price inflation, so much so that actions have needed to be taken (such as raising rates and pulling back on stimulus) to stop hyperinflation. Following the Great Recession, however, this long held belief of how inflation works seems to be in question as inflation remains stubbornly below the Fed’s target and does not seem willing to move toward the 2 percent target rate any time soon. Inflation will likely be one of the main topics at the Jackson Hole Economics Symposium this week as central bankers from around the world come to discuss the global economic situation at this annual mountain getaway, sponsored by the St Louis Federal Reserve. In the past at this conference, there have been several key speeches that have changed the course of global central bank thinking. On Friday, both Fed Chair Yellen and ECB President Draghi take the stage, about 3 hours apart from each other. The global markets will be watching very closely.

 

US news impacting the financial markets:

 

Politics, the FOMC and earnings were the primary news themes impacting the US financial markets last week. The revolving door at the White House was busy last week as all Presidential advisory councils made up of business leaders were disbanded, if you listen to the White House, or the advisors resigned, if you listen to most members of the groups. President Trump’s remarks on the racial violence in Charlottesville were the main factor behind the executives’ decision to leave the groups. This mass exodus of business leaders will probable cause problems in the future as President Trump will be acting without input from the very people who know the most about various subjects and industries impacting the US economy. One odd aspect to this exodus is that there was no mention of reconvening the groups with new participants. The groups are done, just like Steve Bannon, who is the latest of the inner circle to fall with his last day in the White house being Friday of last week. New Chief of Staff John Kelly seems to be cleaning house, but much like the Presidential councils, one must wonder who is willing to step into these newly vacant positions to advise the President. At the end of last week, there were rumors that Gary Cohn was considering jumping ship. He released a statement that this was not so, but if it turns out to be true, it could deal a major blow to the tax reform agenda of the President as he is the primary force behind the plan on Capitol Hill.

 

The meeting minutes from the July FOMC meeting were also released last week and held some interesting information that had not previously been clear to the financial markets. There is a great divide forming within the Fed and voting members of the FOMC around both the timing or the next rate hike and the timing of the balance sheet reduction plans. A major sticking point among Fed officials is inflation. “Some participants” who counseled patience expressed “concern about the recent decline in inflation” and said the Fed “could afford to be patient under current circumstances.” They “argued against additional adjustments” until the central bank was sure that inflation was on track. On the other side of the argument, some Fed members were “worried about risks arising from a labor market that had already reached full employment and was projected to tighten further.” Even on the balance sheet reduction plan there was division, with some members of the committee wanting a “concrete start date” and others wanting to wait for more data to come in before formally announcing when the program will commence. A positive note from the meeting minutes was that members of the Fed almost universally think the US economy is on solid footing. As is normally the case, they did raise concern about the political environment in Washington DC and the upcoming debt ceiling fight that will likely play out over the next few months. While all of this was going on last week, earnings season for the second quarter of 2017 continued to roll toward a close.

 

Earnings season for the second quarter of 2017 is quickly decelerating toward the finish line. Below is a table of the well-known companies that released earnings last week with earnings that missed expectations highlighted in red, while earnings that beat expectations by more than 10 percent are highlighted in green:

 

Advance Auto Parts -4% Estee Lauder 19% Ross Stores 8%
Applied Materials 4% Foot Locker -31% Staples 0%
Coach 2% Gap 12% Target 3%
Deere & Company 2% Home Depot 2% Tjx Companies 1%
Dick’s Sporting Goods -4% Jack Henry & Associates 0% Wal-Mart Stores 1%

 

Wal-Mart and Target, the two big stocks the market was watching very closely last week for any clues about US consumers, both posted better than expected results, but this was largely expected. Online sales were one bright spot in the report from Wal-Mart as the company saw a more than 50 percent increase in online shopping during the quarter. The buy-at-home and pick-up in-store option also appeared to be gaining steam during the quarter. Target, which has always been late to the party with online retail sales, started a fill-a-box-and-we-will-ship-it-to-you campaign, but it is yet to be seen if the company will be able to catch up to Wal-Mart, who is chasing Amazon for online retail dollars. Foot Locker totally missed the boat with online retail sales, once again posting a dismal quarter and missing analysts’ already low expectation for the quarter. At this point, it is becoming more and more difficult to see how Foot Locker will manage to stay in business with companies like Amazon and Wal-Mart taking a large amount of the footwear volume. Dick’s Sporting Goods also pointed toward online competition as a reason for its earnings miss as the company seems to have failed to capitalize on its main competitor, Sports Authority, going out of business about 18 months ago. On the positive side last week, Estee Lauder and Gap, two higher end retailers turned in strong results as increased foot traffic at retail locations were strong during the quarter for both brands.

 

According to Thomson Reuters, we have seen 474 (95 percent) of the S&P 500 companies release their results for the second quarter of 2017. Of the 474 companies that have released earnings, 74 percent have beaten earnings estimates, while 9 percent have met expectations and 18 percent have fallen short of expectations. When looking at revenue, of the companies that have reported, 69 percent of the companies have beaten estimates, while 31 percent have fallen short. The overall earnings growth rate for the S&P 500 thus far stands at 12.1 percent, with Healthcare and Information Technology being the top performing sectors in terms of the percentage of companies in the sector that have reported earnings beating expectations. For the next week, there will be a significant number of retailers reporting earnings, but on the whole, it is unlikely the overall figures mentioned above will move a meaningful amount.

 

Retailers continue to dominate earnings reporting this week with the more discount leaning retailers such as Big Lots, DSW and Dollar Tree reporting their earnings. The table below shows the companies that have the greatest potential to move the markets highlighted in green:

 

Big Lots Guess? Sanderson Farms
Burlington Stores HP JM Smucker
Cree Intuit Splunk
Salesforce.com Lowe’s Tiffany & Co
Dollar Tree Medtronic Toll Brothers
DSW Michaels Williams-Sonoma

 

Discount retailers will lead the way this week as there are four well-known companies reporting earnings: Big Lots, Dollar Tree, DSW and Burlington Stores. It is difficult to say how they will report since we have seen very mixed results so far, but one thing that could be in common for all four is that they all lack a significant online sales presence. However, the type of products offered at these stores and the shoppers who frequent these stores may not lend well to online shopping. On the higher end this week, Tiffany & Company and Toll Brothers both report earnings and are expected to post strong results. Splunk has become a proxy for many private companies and can therefore have a noticeable impact on things like IPOs and private equity fund raising rounds. Splunk is a big data company that takes data and turns it into useful information across hundreds of different areas of work. Being one of the only truly big data companies trading anywhere in the world gives it a unique opportunity to shape investors’ thoughts about a somewhat clandestine group of companies.

 

Global news impacting the markets:

 

With last week being the height of summer holidays for Europeans and with a general lack of additional information coming out of Asia, most of the global media focused on the US. The markets did react negatively to the ISIS terrorist attack in Spain toward the end of the week, during which a speeding vehicle was driven into a crowd of soft targets. With heightened volatility around the world, investors pushed money toward the standard safety assets, such as the Japanese Yen and Swiss Franc and real estate around the world. Even North Korea remained largely silent last week after the very verbose exchange two weeks ago caused the global markets to retreat.

 

Technical market review:

 

There were no changes made over the course of the previous week in the technical charts drawn below. The green lines remain the daily index movements, while the yellow lines are the trading ranges that have been drawn based on the index movements of the past several weeks. The red line on the VIX chart remains the 52-week average level of the VIX.

After briefly making it back above their most recent trading ranges early last week, both the S&P 500 (upper left pane above) and the NASDAQ (lower left pane above) broke back down toward the end of the week, ending the week down in the middle of the ranges. The Dow (upper right pane above) managed to stay above its most recent trading range, but the index closed lower for the week, ending less than one percent from the upper edge of its most recent trading range. Given the recent volatility that we have seen in the markets, it would not be surprising to see all three of the indexes soon test the lower edge of their trading ranges. The VIX (lower right pane above) saw a very wild week with swings of more than 20 percent being common. After crashing back down to start the week last week, the VIX spiked right back up on Thursday before giving a little back to close out the week on Friday. Currently, all of the technical indicators are pointing toward more spiky trading in the indexes as the slow summer trading season comes to an end in about two weeks’ time.

 

Hybrid model performance and update

For the trading week ending on 8/18/2017, returns in the hybrid and quant hypothetical models* (net of a 1% annual management fee) were as follows:

 

Last Week 2017 YTD Since 6/30/2015
Aggressive Model -0.44% 5.44% 11.13%
Aggressive Benchmark -0.13% 10.41% 10.20%
Growth Model -0.38% 5.22% 9.98%
Growth Benchmark -0.10% 8.12% 8.28%
Moderate Model -0.32% 4.54% 8.36%
Moderate Benchmark -0.07% 5.87% 6.26%
Income Model -0.32% 4.30% 7.92%
Income Benchmark -0.03% 3.11% 3.59%
Quant Model -0.43% 10.86%
S&P 500 -0.65% 8.34% 17.57%

*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 to the hybrid models last week with all of them being defensive in nature. The first change was to sell the entire position in the S&P 500 high beta ETF (SPHB). This position was put on largely to participate in areas of the markets the hybrid models lacked exposure to through the individual stock holdings. Areas such as oil and gas, financials and technology make up most of the holdings in the fund. The fund was also one of the most volatile holdings in the models during the recent VIX spikes.

 

The second change in the hybrid models was selling half of the holding in the Rydex Banking fund (RYKIX). This fund had recently been the second most volatile holding in the hybrid models and with the changes coming from the White House it looks like there will be potentially less of a tail wind for the banking sector than was anticipated.

 

The third change to the hybrid models last week was to increase the hedging position in Direxion S&P 500 Bear fund (DXSSX). Having had a small, partially hedging position in place for the past month, considering the recent volatility in the market, it was prudent to increase the hedging position to help offset any future downward movement in the individual stock holdings. In looking back at the past several weeks and taking out movements that were a direct result of earnings reports, an increased hedge up to current levels would not have materially lowered performance on positive market moving days, while it would have helped dampen the downside felt in the hybrid models during significant negative market days.

 

The final change last week was a byproduct of a few of the other changes and that was having the hybrid models increase the cash holdings in each model. The hybrid models are now positioned for a continuance of increased volatility, while still being engaged in an upward moving market, should it occur.

 

Market Statistics:

 

The US markets were down last week on the violence seen in parts of the US, terrorism in Europe and uncertainty in Washington DC:

 

Index Change Volume
NASDAQ -0.64% Below Average
S&P 500 -0.65% Below Average
Dow -0.84% Average

 

Volume last week was below average on both the S&P 500 and the NASDAQ, while the Dow just barely saw average volume, thanks in large part to earnings reports and the corresponding surge in trading on stocks such as Wal-Mart. Now that earnings season for the second quarter is largely over, we will likely see low volume trading over the next few weeks as we lead up to the Labor Day holiday weekend and the official end to summer trading.

 

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
Utilities 1.33% Consumer Service -1.69%
Software 0.88% Natural Resources -1.97%
Infrastructure 0.87% Energy -2.35%
Materials 0.73% Telecommunications -2.80%
Global Real Estate 0.56% Oil & Gas Exploration -3.65%

 

Utilities lead the way higher last week as a risk-off trade seemed to be permeating through the markets during the down days and not falling apart on the subsequent bounces in the markets. Software got a bump from earnings in the relatively small sector, pushing it to the top five performing sectors. Infrastructure and Materials got a boost from President Trump and his infrastructure executive order, signed last week, as well as his going after the dumping of steel and other materials in the US by foreign companies. Global Real Estate rounded out the top five sectors last week as the sector saw large inflows of funds as it is a safe-haven asset from geopolitical risks around the world. The negative performing sectors last week were led by Oil and Gas Exploration, which tumbled more than three and a half percent on uncertainty over oil coming out of Venezuela as well as two Texas oil refineries (one owned by Exxon and one by Shell) being shut down. The knock-on effects of these shutdowns and other factors also contributed to Energy overall being the third worst performing sector of the markets last week. Consumer Services and Natural Resources rounded out the bottom five performing sectors of the markets last week as investors seemed to be selling assets in these two areas in favor of buying in more defensive areas of the market or just holding on to extra cash in their investment portfolios.

 

Fixed income investments in the US were mostly positive last week as fixed income traders benefited from the continued volatile trading in the equity markets:

 

Fixed Income Change
Long (20+ years) 0.15%
Middle (7-10 years) 0.02%
Short (less than 1 year) 0.05%
TIPS -0.25%

Global currency trading volume was below average last week with most of Europe being on Holiday. Overall, the US dollar increased 0.41 percent against a basket of international currencies. The best performing of the global currencies last week was the South African Rand, as it gained 2.3 percent against the value of the US dollar. The worst performance among the global currencies was the Venezuelan Bolivar, which declined 1.7 percent against the US dollar, as the political uncertainty over the government of President Maduro remains a headwind for the country.

Commodities were mixed last week as Copper was the lone gainer, while all of the other commodities pushed lower:

Metals Change Commodities Change
Gold -0.40% Oil -0.20%
Silver -0.43% Livestock -2.57%
Copper 0.99% Grains -3.04%
Agriculture -2.76%

The overall Goldman Sachs Commodity Index declined 0.42 percent last week, driven by the movement in the non-oil commodities. Oil declined 0.2 percent last week during what turned out to be a very tame trading week for the energy producing commodity. Metals were mixed last week with Gold and Silver declining 0.4 and 0.43 percent, respectively, while Copper bucked the trend and advanced by 0.99 percent. Soft commodities were negative last week with Grains, Livestock and Agriculture posting declines of 3.04, 2.57 and 2.76 percent, respectively.

Top 2 Indexes Country Change Bottom 2 Indexes Country Change
Merval Argentina 6.17% OMX Copenhagen Denmark -1.03%
Tel Aviv Israel 2.27% Nikkei 300 Japan -1.22%

Last week was a mixed week for the global stock indexes with 66 percent of the global markets posting gains. The best performing index last week was found in Argentina with the Merval index posting a gain of 6.17 percent for the week. The worst performing index last week was found in Japan and was the Nikkei 300 Index, which turned in a loss of 1.22 percent for the week.

After spiking back to life two weeks ago, the VIX last week continued its trend of very spiky and erratic movements last week, ending the week with a relatively tame decline of 7.87 on a point to point basis.  However, the intraweek movements of the VIX last week were extreme with the index gaining or falling by more than 20 percent at several points during the week. One item of note about the VIX is that the spike we saw on Thursday last week stopped short of the spike we saw two weeks ago, meaning overall fear didn’t increase as much last week as it did surrounding the back and forth exchange with North Korea two weeks ago. The current reading of 14.29 implies that a move of 4.13 percent is likely to occur over the next 30 days. As always, the direction of the move over the next 30 days is unknown.

Economic Release Calendar:

 

Last week was a full week for economic news releases, but there were no releases that came in significantly different than expected:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Neutral 8/15/2017 Retail Sales July 2017 0.40% 0.30%
Neutral 8/15/2017 Retail Sales ex-auto July 2017 0.30% 0.30%
Slightly Negative 8/15/2017 Empire Manufacturing August 2017 11 13
Neutral 8/16/2017 Housing Starts July 2017 1155K 1217K
Neutral 8/16/2017 Building Permits July 2017 1223K 1247K
Neutral 8/16/2017 FOMC Minutes July 2017 N/A N/A
Neutral 8/17/2017 Philadelphia Fed August 2017 18.9 17
Slightly Positive 8/18/2017 University of Michigan Consumer Sentiment August 2017 97.6 94

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

 

Last week the economic news releases started on Tuesday with the release of retail sales, both including and excluding auto sales, for the month of July, which came in very close to expectations. Both figures had a negligible impact on the markets and will likely have little impact on the Fed’s thinking. Later during the day on Tuesday, the Empire manufacturing index for the month of August was released and came in slightly below expectations with a reading of 11, while the market had been looking for a reading of 13 on the index. So, while the index posted an expansion in manufacturing activity in the greater New York area, it increased at a slower pace than was expected. On Wednesday, two housing related data points started off the day for economic new releases. Building starts and building permits for the month of July were released, with both coming in very close to expectations and having no noticeable impact on the markets. Later during the day on Wednesday, the Fed released the meeting minutes from its previous meeting. As mentioned above in the national news section, the meeting minutes did shine a little light on the thinking of the Fed pertaining to both the start of its balance sheet unwinding and when the Fed should next raise rates, but overall the meeting minutes were non-market moving. On Thursday, the Philadelphia Fed released its latest business conditions index, which came in very close to market expectations and, much like the other releases of the week last week, had no notable impact on the markets. Wrapping up the week last week was the release of the University of Michigan Consumer Sentiment index for the month of August (early month reading), which came in slightly better than expected at 97.6 versus expectations of 94 as the US consumer is once again proving to be very resilient in this current, slow economic expansion.

 

This week is a slow summer week for economic news releases with only one set of releases that could impact the overall movement of the markets. The releases with the greatest potential to impact the markets are highlighted in green below:

 

Date Release Release Range Market Expectation
8/23/2017 New Home Sales July 2017 615K
8/24/2017 Existing Home Sales July 2017 5.56M
8/25/2017 Durable Orders July 2017 -6.00%
8/25/2017 Durable Goods –ex transportation July 2017 0.50%

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

 

This week the economic news releases start on Wednesday with the release of the New Home sales figure for the month of July, which, much like the building permits and housing starts last week, is not expected to show much change over the figures seen in June. Much of the same expectations are in place for the existing home sales figure for the month of July that is set to be released on Thursday as well. Overall, this week’s data and last week’s data will likely point to a US housing market that is still trending upward, but doing so at a much slower pace than it was this time last year. Friday is the big day of the week for economic news releases as the durable goods orders for the month of July are set to be released, both overall and excluding transportation. Overall orders are expected to post a decline of 6 percent, which is a huge swing from the gain of 6.5 percent seen in June. Much of the decline is due to very slow auto and plane sales, which can have a very large impact on the overall calculation due to the relatively high cost for these products when compared to other items in the index such as refrigerators or washers and dryers. Durable goods orders is also a very volatile index, so even if we do see a negative 6 percent change posted, it is unlikely to have a material impact on the markets.

 

Interesting Fact — The Great Eclipse

With so much talk about the Great Eclipse that took place today across the US, I thought a fun fact about stock market performance as it relates to previous eclipses could be interesting. I found research compiled by LPL Financial on the topic, which found the following when looking back at the past 15 eclipses that have occurred in the US:

If this eclipse’s performance results are similar to past results, it could be positive for the markets, both in the short and longer run. However, with only 15 data points, the data in the above table is likely not statistically significant and more of a random occurrence of events than anything else.

 

Source: lpl-research.com

For a PDF version of the below commentary please click here Weekly Letter 8-14-2017

Commentary quick take:

 

  • Major developments:
    • North Korea tensions rattled markets
    • Earnings season pushed over 90 percent
    • All three major US indexes declined

 

  • US:
    • The war of words between the US and North Korea heated up
    • VIX jumped more than 50 percent
    • Inflation data came in poor
    • Q2 earnings growth rate is currently 10.2 percent

 

  • Global:
    • North Korea dominated the headlines
    • China posted some interesting economic data points
    • No change from the bank of New Zealand

 

  • Technical market view:
    • US markets were negative
    • Two indexes back in trading ranges
    • VIX spiked higher

 

  • Hybrid investments strategy update:
    • No changes to the hybrid models last week
    • Performance was strong in the market volatility

 

  • This week for the markets:
    • Washington DC is still on vacation
    • North Korea

 

  • Interesting Fact: 10 years ago

 

Major theme of the markets last week: North Korea

The global financial markets were rattled last week by the increasing rhetoric between North Korea and the US. Reports out of North Korea state that they are evaluating and finishing plans to launch as many as four ICMBs toward the US territory of Guam, landing them about 20 miles off shore. This generated some harsh language from US President Trump who is currently in the middle of a 17-day working vacation in New Jersey. As President Trump became more direct and threatening toward North Korea, the language the regime shot back at the US also became more direct and threatening. This back and forth was the primary driving force behind the movement in the US markets and markets around the world as we saw a flight to safety assets and a spike in the VIX that we have not seen for several months.

 

US news impacting the financial markets:

 

Aside from the President’s statements to North Korea last week, US news impacting the financial markets was nearly nonexistent. With much of Washington DC on vacation for the month of August, the markets were left with thin stories about the upcoming debt ceiling debate and discussions regarding the prospects of Fed actions over the coming months, which became less certain with the inflation data released last week.

The US Federal Reserve has a dual mandate, mentioned numerous times before, with one of the mandates being full employment and the other being price stability. There is little question that the Fed’s actions over the last few years have greatly impacted the US labor market, bringing the US very close to, if not below, the Fed’s full employment target figures. That leaves the only potential issue impacting the Fed’s interest rate decision to be inflation. Inflation currently seems to be the most difficult aspect of the Fed’s dual mandate to get moving in the correct direction.  The charts to the right from investing.com show the Core Consumer Price Index (CPI) in the upper chart and the Core Producer Price Index (PPI) in the lower chart. Both show measures of inflation for the last two years. The Fed’s target rate is 2 percent inflation, which you can see has rarely been achieved. When it has, it has been very short lived. The core indexes are shown since they take out volatile aspects of inflation, such as oil and food, and they are the most watched by the Fed for inflation data points. The CPI has clearly been on a downward trend for 5 of the past 6 months, while the PPI has been trending down for the past three months. When pricing is rising less than 2 percent per year, the Fed would historically be loosening monetary policy, not tightening it. If the Fed goes through with another rate hike this year or start to shrink its balance sheet, it could have deflationary impacts on the economy. The data points last week made the Fed’s upcoming decision more difficult as the Fed has been painting itself into a corner regarding when it indents to start its balance sheet reduction plan and pertaining to another rate hike this year.

The slowdown in second quarter earnings started last week as we approach the completion of the reporting season. 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:

 

Alibaba Group pushed Twenty-first

Century Fox

6% Monster Beverage -3%
Brookdale Senior -141% Henry Schein 1% Nvidia 33%
CBS 7% Jack In The Box -6% Office Depot -33%
Cvs Health 2% J.C. Penney -50% Tyson Foods 1%
Dillard’s -376% Nordstrom 5% Hostess Brands -5%
Walt Disney 3% Kohl’s 4% Wendy’s 15%
Discovery

Communications

-4% Liberty Global pushed Wolverine Worldwide 48%
Energizer 41% Macy’s 7% Zillow Group 20%

 

Retailers were very mixed last week with no clear trend between the higher end and lower end companies that reported earnings. High end retailer Dillard’s saw the largest miss of the week in the table above, missing earnings expectations by 376 percent, while lower end retailer JC Penny missed by 50 percent. On the other end of the earnings spectrum, high end retailers Nordstrom and Macy’s beat expectations by 5 and 7 percent, respectively, while low end retailer Kohl’s beat expectations by 4 percent. One common theme that was present across retail earnings was online sales and, more importantly, online competition as Amazon continues to bully its way into the online retail market place. Brookdale Senior Living had an errant quarter, missing expectations by 141 percent, in an industry that has seen nothing but growth as the number of Americans moving into assisted living and senior communities seems to only be increasing.

 

According to Factset Research, we have seen 455 (91 percent) of the S&P 500 companies release their results for the second quarter of 2017. Of the 455 companies that have released earnings, 73 percent have beaten earnings estimates, while 9 percent have met expectations and 18 percent have fallen short of expectations. When looking at revenue, of the companies that have reported, 69 percent of the companies have beaten estimates, while 31 percent have fallen short. The overall earnings growth rate for the S&P 500 thus far stands at 10.2 percent, with Healthcare and Information Technology being the top performing sectors in terms of the percentage of companies in the sector that have reported earnings beating expectations. For the next two weeks, there will be a significant number of retailers reporting earnings, but on the whole, it is unlikely that the overall figures mentioned above will move a meaningful amount.

 

Big box retailers will dominate earnings reporting this week with both Wal-Mart and Target reporting their earnings. The table below shows the companies that have the greatest potential to move the markets highlighted in green:

 

Advance Auto Parts Estee Lauder Ross Stores
Applied Materials Foot Locker Staples
Coach Gap Target
Deere & Company Home Depot Tjx Companies
Dick’s Sporting Goods Jack Henry & Associates Wal-mart Stores

 

Wednesday and Thursday will be significant as Target reports its latest earnings on Wednesday, followed by Wal-Mart on Thursday. These two companies combined have a remarkable physical presence in the US and touch a significant portion of Americans. Based on previous releases from retailers, it is a difficult quarter to gauge how either of these companies’ earnings reports will go. Wal-Mart will be closely watched to see how its online sales did during the quarter as it fully integrated its previous Jet.com purchase to make up lost ground on Amazon. Home Depot could make headlines and provide some insight into the mindset of American home owners as home owners typically increase spending at home improvement stores when they feel positive about their prospects for home price appreciation. The spring retail sale season for Home Depot falls squarely in the second quarter and is a key season for its overall annual earnings, so we could see an impact from those sales on the stock price as well. Most of the other releases this week are other retailers that have specialized offerings such as sporting goods or office supplies, with results likely to be mixed from the group.

 

Global news impacting the markets:

 

Global news last week was consumed by the developments between North Korea and the US as there was little else going on anywhere in the world. In Europe, most of the countries are on holiday, so the trading volume and news flow were extremely low. There was a central bank meeting last week; the reserve Bank of New Zealand met for its August meeting and kept its rate policy unchanged, as expected. In China, several interesting economic news releases pertaining to trade were released last week and the numbers came in far lower than anticipated. Exports from China for the month of July came in at 7.2 percent growth, which sounds good on the surface, but was a far cry from the 11.3 percent growth seen in June that was expected to continue. Exports slowing to the US (8.5 percent in July versus 19.7 percent in June) and the EU (9.5 percent in July versus 15.1 percent in June) were the primary drivers of the decline. China also posted a trade surplus that was about 25 percent lower in 2017 than this time in 2016. China has long been trying to move from an export driven economy to an increasingly internal consumption economy, but these latest numbers show a significant drop off in exports that cannot easily be overcome by internal consumption. While the debate surrounding China experiencing a hard or soft landing has largely been toned down, it is still a significant risk to the global economy if China starts to falter. One other country that could soon falter is Venezuela.

Venezuela has been in economic trouble for several years as President Maduro rode the price of oil to all-time highs, spending very liberally, and then slashed many welfare programs as the price of oil started to decline while favoring his political base with state resources. President Maduro has slowly been losing his grip on the country and is increasingly taking desperate measures to stay in power. His latest play was a sham election that created a new, elected National Constituent Assembly that has the power to rewrite the constitution and override many of the country’s other laws, rendering President Maduro the equivalent of a dictator. The ramifications throughout the region of Venezuela coming apart at the seams could be far reaching as Latin America is already dealing with mass corruption in Brazil and other troubles in Columbia. The potential impact on the US has generally been underreported. The US has been putting sanctions on various officials in Venezuela, including the President himself for several weeks, and calling for Presdeint Maduro to stop his power grab. These calls seem to be falling on deaf ears as President Maduro continues to systematically remove people who are openly against him at various levels of the government. Sanctioning oil exports from the country would likely be the fastest and only way to force a political change, with oil being the lifeblood of the Venezuelan government, but about 7 percent of US oil imports come from Venezuela, according to Stratfor. These imports are largely refined in the Gulf states and if oil supplies from Venezuela are cut off, it could cause a temporary spike in gasoline prices in the US as the refineries adjust manufacturing capacities to different types of crude and shift their oil imports to other sources. A spike in gasoline prices could adversely impact US consumer spending because of diminished disposable income.

 

Technical market review:

 

There were no changes made over the course of the previous week in the technical charts drawn below. The green lines remain the daily index movements, while the yellow lines are the trading ranges that have been drawn based on the index movements of the past several weeks. The red line on the VIX chart remains the 52-week average level of the VIX.

Both the S&P 500 (upper left pane above) and the NASDAQ (lower left pane above) fell back down into their respective trading ranges, aided by the large downward move seen last Thursday, and failed to make it back above their ranges with the dead cat bounce on Friday. The Dow (upper right pane above) was far enough above its most recent trading range that it did not fall all the way back into it, but instead stayed significantly above the range, making it the strongest of the three major indexes in terms of technical strength. The VIX (lower right pane above) finally came back to life last week as it spiked upward by more than 40 percent on Thursday, only to give back a little of those gains on Friday.

 

Hybrid model performance and update

For the trading week ending on 8/11/2017, returns in the hybrid and quant hypothetical models* (net of a 1% annual management fee) were as follows:

 

Last Week 2017 YTD Since 6/30/2015
Aggressive Model -0.87% 5.89% 11.61%
Aggressive Benchmark -1.45% 10.56% 10.35%
Growth Model -0.60% 5.62% 10.40%
Growth Benchmark -1.12% 8.23% 8.39%
Moderate Model -0.29% 4.87% 8.71%
Moderate Benchmark -0.80% 5.94% 6.33%
Income Model -0.11% 4.63% 8.27%
Income Benchmark -0.40% 3.14% 3.62%
Quant Model -0.35% 11.33%
S&P 500 -1.43% 9.04% 18.33%

*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 we saw a general flight toward the lower risk equity holdings in the hybrid models. During times when market volatility rises or the markets in general struggle, it becomes clear why the hybrid models have concentrations in low volatility stocks. This week, the hybrid models could be impacted either positively or negatively by the earnings announcements from Wal-Mart late in the week as there are typically knock-on effects on other stocks in the retail and consumer products sectors following the company’s earnings report.

 

Market Statistics:

 

The US markets were down last week with tensions escalating between the US and North Korea being the primary driver of performance:

 

Index Change Volume
Dow -0.93% Average
S&P 500 -1.29% Average
NASDAQ -1.53% Above Average

 

Volume last week was average on both the S&P 500 and the Dow and above average on the NASDAQ, thanks in large part to the increased trading on Nvidia, which reported a positive quarter. There was a general flight to safety in the indexes as the Dow (historically the safest index) declined the least, while the NASDAQ (historically the most risky index) declined the most. Getting an honorable mention this week in the indexes is the Russell 2000 (broad small cap index), which moved down by 2.70 percent last week, further signifying a risk-off trade being in effect.

 

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
Global Real Estate 0.26% Financials -2.74%
Semiconductors 0.02% Energy -2.82%
Utilities -0.22% Oil & Gas Exploration -2.88%
Consumer Goods -0.30% Biotechnology -2.91%
Aerospace & Defense -0.39% Regional Banks -4.16%

 

Other than several fixed income categories of investments, last week there were only two sectors of the markets that managed to pull off a gain for the week: Global Real Estate and Semiconductors. The real estate movement last week was a flight to safety, while the semiconductor performance was a function of earnings reports more than anything else. Defensive sectors of the markets made up the bottom 3 spots of the top performing sectors last week as Utilities, Consumer Goods and Aerospace and Defense all made the list. The negative performing sectors of the markets were an interesting mix last week as financial related sectors moved to the bottom and fifth from bottom spots. Oil seemed to have a larger than expected impact on sector performance last week, given the relatively small move in oil prices, as Oil and Gas Exploration as well as Energy overall both made the bottom five list.

 

Fixed income investments in the US were positive last week as fixed income traders benefited from the risk-off trade that permeated the markets:

 

Fixed Income Change
Long (20+ years) 1.20%
Middle (7-10 years) 0.58%
Short (less than 1 year) 0.01%
TIPS 0.56%

Global currency trading volume was below average last week. Overall, the US dollar decreased 0.50 percent against a basket of international currencies. The best performing of the global currencies last week was the Japanese Yen, as it gained 1.4 percent against the value of the US dollar. The worst performance among the global currencies was the Brazilian Real, which declined 1.9 percent against the US dollar.

Commodities were mixed last week as metals moved higher while all of the other commodities pushed lower:

Metals Change Commodities Change
Gold 2.62% Oil -1.38%
Silver 5.14% Livestock -2.70%
Copper 0.91% Grains -2.35%
Agriculture -2.34%

The overall Goldman Sachs Commodity Index declined 0.62 percent last week, driven by the movement in the non-oil commodities. Oil declined 1.38 percent last week as optimism in anticipation of a major change from the OPEC meeting held last week fizzled out. The OPEC meeting largely comprised several member countries berating other countries for not conforming to the production cuts that had been agreed to. Metals gained last week with Gold, Silver and Copper advancing 2.62, 5.14 and 0.91 percent, respectively. Soft commodities were negative last week with Grains, Livestock and Agriculture posting declines of 2.35, 2.70 and 2.34 percent, respectively.

Top 2 Indexes Country Change Bottom 2 Indexes Country Change
OMX Copenhagen Denmark 0.83% IBEX 35 Spain -3.52%
Sao Paulo Bovespa Brazil 0.69% Tel Aviv Israel -3.79%

Last week was one of the most negative weeks that we have seen over the past 2 years with only 5 percent (3 indexes) of the global markets posting gains. The best performing index last week was found in Denmark with the OMX Copenhagen exchange posting a gain of 0.83 percent for the week. Much of the gain seen in Denmark was due to its economy being more loosely tied to the global financial markets than almost any other developed country in the world. The worst performing index last week for the second week in a row was found in Israel and was the Tel Aviv Index, which turned in a loss of 3.79 percent for the week.

“Back to Life” was the theme for the VIX last week as volatility, as measured by the VIX, jumped higher over the course of the week. Overall, the VIX increased by 56 percent last week, giving it the largest weekly spike since the week of December 11th, 2015. While the spike in the VIX was certainly impressive, it is highly likely that the spike will be short lived, as has been the case with the past several lofty spikes. The current reading of 15.51 implies that a move of 4.48 percent is likely to occur over the next 30 days. As always, 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 there were releases that could impact the Fed’s future thinking. There were two releases that significantly missed market expectations and none that significantly beat expectations:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Negative 8/10/2017 PPI July 2017 -0.10% 0.20%
Negative 8/10/2017 Core PPI July 2017 -0.10% 0.20%
Neutral 8/11/2017 CPI July 2017 0.10% 0.20%
Neutral 8/11/2017 Core CPI July 2017 0.10% 0.20%

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

 

The economic news releases last week started on Thursday when the producer Price Index (PPI) for the month of July, both overall and core, badly missed market expectations. Expectations for PPI (overall and core) was that it would post a slight gain of 0.2 percent, but both readings posted a decline of one tenth of a percent, which is negative for the overall US economy and negative for the Fed’s upcoming plans, as discussed above. On Friday, the Consumer Price Index (CPI) for the month of July was released and while both calculations (overall and core) also missed expectations, neither number dipped into negative territory like the PPI released earlier in the week. In aggregate, these economic data points will likely make the Fed’s upcoming decisions more difficult.

 

This week is a typical summer week for economic news releases with a few releases that could impact the overall movement of the markets. The releases with the greatest potential to impact the markets are highlighted in green below:

 

Date Release Release Range Market Expectation
8/15/2017 Retail Sales July 2017 0.30%
8/15/2017 Retail Sales ex-auto July 2017 0.30%
8/15/2017 Empire Manufacturing August 2017 13
8/16/2017 Housing Starts July 2017 1217K
8/16/2017 Building Permits July 2017 1247K
8/16/2017 FOMC Minutes July 2017 Previous Meeting
8/17/2017 Philadelphia Fed August 2017 17
8/18/2017 University of Michigan Consumer Sentiment August 2017 94

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, both including and excluding auto sales, for the month of July, which is anticipated to show a slight increase of 0.3 percent on both readings. If the actual readings come in at zero or below on these two releases, it could be bad for the overall markets and really put the question of “Is the economy strong enough for this?” into the minds of Fed officials. Later during the day on Tuesday, the Empire manufacturing index for the month of August is set to be released with expectations of an increase from 9.8 up to a reading of 13, which would be a positive development for manufacturing in the greater New York region. On Wednesday, two housing related data points start off the day for economic new releases. Building starts and building permits for the month of July are released, with both expected to post about 1.2 million units during July, which would be strong but not great. Later during the day on Wednesday, the Fed releases the meeting minutes from its previous meeting. The key to these minutes will be any further detail about the Fed’s plan to start unwinding its balance sheet or plans about raising rates later this year. It is unlikely that there will be any material information in the releases, but there is always the chance of something new being in there and the markets taking hold of it. On Thursday, the Philadelphia Fed releases its latest business conditions index, which will show how manufacturing and other businesses are doing in the region. Unlike the Empire index earlier in the week, this index is expected to show a small decline when compared to the July levels. Wrapping up the week this week is the release of the University of Michigan Consumer Sentiment index for the month of August (early month reading), which is expected to show little change over the end of July reading of 93.4. In addition to the above mentioned economic news releases, there are also two Fed officials giving speeches this week and the market will likely be watching them closely given the lack of other information to follow this summer trading week.

Interesting Fact — The Great Recession

 

It was exactly 10 years ago last Wednesday that the ball started rolling on the Great Recession. French Bank BNP Paribas blocked withdrawals from hedge funds that operated in subprime mortgage debt financing. While this is an early date given that the fall of Lehman Brothers would not come for another year and the depth of Great Recession would not be reached until early 2009. August 9th, 2007, is commonly referred to at the actual starting point of the crisis.

 

Source: www.usatoday.com

For a PDF version of the below commentary please click here Weekly Letter 8-7-2017

Commentary quick take:

 

  • Major developments:
    • Another one bites the White House dust
    • Earnings season pushed over 80 percent
    • Debt ceiling debate starting
    • Dow jumps higher on earnings

 

  • US:
    • Nothing accomplished on Capitol Hill
    • Congress is in recess
    • President Trump is golfing for vacation
    • Earnings season is starting to come to an end
    • Q2 earnings growth rate is currently 10.1 percent

 

  • Global:
    • Three central bank meetings
    • Could the BOE be getting ready to raise rates?

 

  • Technical market view:
    • US markets were mixed
    • Dow jumped on strong earnings
    • VIX moved slightly lower for the week

 

  • Hybrid investments strategy update:
    • No changes to the hybrid models last week
    • Earnings season for hybrid holdings remains mixed

 

  • This week for the markets:
    • Washington DC on vacation
    • OPEC meeting

 

  • Interesting Fact: Debt ceiling debacle

 

Major theme of the markets last week: The bull market rallied onward

Driven by the strong earnings currently being reported for the second quarter, the bull market in the US marched forward. Earnings were robust last week, pushing the blended earnings growth rate on the S&P 500 up to 10.1 percent. Fundamentally, very little changed in the US markets last week. Nearly every major index continues to look overextended when looked at from a rational valuation method or even from simple technical indicators. “How long can the market run like this?” is a common question being asked by a large number of investors and the answer is that no one knows. The VIX is pointing toward the continuation of a slow melt up, despite geopolitical tensions mounting around the world. At times like these in the markets, it behooves investors to remember the Warren Buffett adage of being greedy when investors are fearful and fearful when investors are greedy.

 

US news impacting the financial markets:

 

Last week, the US news impacting the financial markets was mainly focused on Washington DC and corporate earnings. Washington DC is always interesting, but the Trump administration has been more interesting than normal. White House communications director Anthony Scaramucci is out of a job after holding the position for a mere 11 days. New chief of staff John Kelly has an enormous job ahead of him, trying to bring order to a chaotic White house that has yet to be tamed. He should have time to work on things as President Trump has gone on his first official vacation since taking office, spending the next 17 days at one of his private golf courses in New Jersey. While the President is on vacation, special counsel Robert Muller seems to be ramping up his investigation, announcing last week that he impaneled a grand jury. This announcement had a meaningful negative impact on the market, but the markets recovered after most investors found “impaneling a grand jury” to be a step forward in the investigation, not a meaningfully negative development. On Capitol Hill, both houses of Congress were busy at work trying to get traction on any legislation before the August recess, ultimately getting nowhere. The debt ceiling fight and looming potential government shutdown is on the horizon when they return to work in early September and the markets seem to be taking notice. Each time the shutdown was mentioned in the media last week, the market seemed to pause and reevaluate the possibility of a debt ceiling fight or government shut down. The Republicans will likely try to tie healthcare reform into the debt ceiling debate and this action will make the whole thing a non-starter. The last time Congress used the debt ceiling as a political football, the US saw its debt credit rating downgraded for the first time in modern history. Not passing a debt ceiling increase and triggering selective payments by the government could negatively impact markets both here in the US and abroad. The timing of the debate happens to conincide with the time the Fed seems interested in starting the Great Unwind of its bloated balance sheet. If the debt ceiling precludes the Fed from being able to start its unwinding program, it would also likely be negative for the overall markets. Counter balancing the political negatives coming out of Washington DC last week was the continuance of the second quarter earnings season, which has thus far been very strong.

 

Last week was a very interesting week in terms of earnings announcements and the corresponding market reactions. 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:

 

Apple 6% Fortune Brands 6% Ferrari 20%
Archer Daniels Midland 10% Hyatt Hotels 49% Royal Caribbean 2%
Aetna 46% Hanesbrands 0% Re/Max 10%
AIG 28% Honda Motor 25% Sprint 600%
Allstate 53% Jack In The Box pushed Sprouts Farmers Market 16%
Sotheby’s 4% Kellogg Company 5% Simon Property 1%
Ball Corporation -4% The Kraft Heinz 2% Molson Coors -19%
Brookfield Properties 0% Mondelez 4% Teva Pharmaceutical -7%
Berkshire Hathaway -10% MetLife 2% Toyota Motor 36%
Cabela’s -7% Newell Brands 1% Tesla -2%
Cardinal Health 6% Owens & Minor 0% Time Warner 12%
The Cheesecake Factory 3% Pfizer 3% Under Armour 50%
Church & Dwight 5% Pilgrim’s Pride 11% Marriot Vacation Club 27%
CenturyLink -6% Prudential -23% Aqua America 0%
Energizer 16% Phillips 66 7% Xerox 4%
Enterprise Products -9% Papa John’s 3% Yum! Brands 11%

 

Sprint is the standout figure above as the company beat market expectations by 600 percent. The number is a little misleading, however, as expectations for the quarter from Sprint were for a decline of $0.01 and Sprint posted a gain of $0.05. While it was a nice turn around, it was not as positive as a 600 percent surprise may seem. Teva Pharmaceuticals missed expectations by 7 percent last week and lowered its guidance for the remainder of the year and was promptly greeted by a decline of more than 38 percent over the following few trading days. Tesla, on the other hand, missed market expectations by a little, but gave great forecasted numbers and saw its stock jump by nearly 10 percent on the hope that Tesla will be able to meet its production projections for the Model 3 sedan. Apple was the company everyone was watching last week, as is normally the case during the week in which Apple reports earnings, but this release was nothing spectacular. Apple beat expectations by a little and was rewarded with a stock gain of more than 4 percent the following day.

 

According to Factset Research, we have seen 421 (84 percent) of the S&P 500 companies release their results for the second quarter of 2017. Of the 421 companies that have released earnings, 72 percent have beaten earnings estimates, while 9 percent have met expectations and 19 percent have fallen short of expectations. When looking at revenue, of the companies that have reported, 70 percent of the companies have beaten estimates, while 30 percent have fallen short. The overall earnings growth rate for the S&P 500 thus far stands at 10.1 percent, with Healthcare and Information Technology being the top performing sectors in terms of the percentage of companies in the sector that have reported earnings beating expectations. As we move further and further into earnings season it starts to become increasingly difficult for the figures mentioned above to materially change. After this coming week, we will have seen more than 90 percent of the S&P 500 component companies report their results and should at that point have a very clear reading on how the quarter will end up. So far, the second quarter earnings season has been very strong as earnings growth continues to impress investors, being over 10 percent.

 

This week is the start of the decline for second quarter earnings season as there are more than 900 companies reporting their results, but the vast majority is small, obscure companies that very few people have heard about. The table below shows the companies that have the greatest potential to move the markets highlighted in green:

 

Alibaba Group Twenty-first Century Fox Monster Beverage
Brookdale Senior Living Henry Schein Nvidia
CBS Jack In The Box Office Depot
CVS Health J. C. Penney Tyson Foods
Dillard’s Nordstrom Hostess Brands
Walt Disney Kohl’s Wendy’s
Discovery Communications Liberty Global Wolverine Worldwide
Energizer Macy’s Zillow Group

 

Alibaba, being one of the most well-known Chinese companies in the world and now the proud or not so proud owner of Yahoo, will be closely watched by Wall Street this week for any insight into what is occurring within the Chinese economy. Walt Disney is always an interesting earnings release.  Investors will wait to see how much ESPN has hurt the company overall and will try to get a read on consumer spending through amusement park attendance. Retailers start to become more prevalent in terms of the number of releases this week as Kohl’s, Macy’s, Nordstrom, Dillard’s and JC Penney all report earnings. Retail as a group normally splits into two segments, the higher end retailers and the lower end retailers, with one group performing well during the quarter, while the other struggles. Looking at consumer spending in the second quarter figures, it seems the lower end retailers could see better performance than the higher end retailers this time around.

 

Global news impacting the markets:

 

Global news last week remained quiet as many areas of the developed world took time off for summer vacation. There were, however, three central bank meetings last week around the world with the Reserve Bank of India cutting its key interest rate by one quarter of a percent as it tries to offset a falling rate of inflation within the country. The Bank of England (BOE) and the Bank of Australia both held meetings last week, which resulted in no change in any of the rates or policies. There was a change in the growth forecast released by the BOE, however, as the bank now expects growth in the UK to be 1.7 percent in 2017 and 1.6 percent in 2018, both revised lower from previous projections. There was also the addition of language in the BOE’s statement that said it could be time to start raising interest rates in about a year, but this of course hinges on things continuing to improve in the UK and on the Brexit negotiations going well for the UK. The Bank of Australia made no significant changes to its statement and the meeting was largely ignored by the global markets. This week, the focus of the international media will need to shift from Washington DC as there will not be much going on there. Perhaps the media will focus on the OPEC meeting that could further cut oil output from the group to the rest of the world.

 

Technical market review:

 

There were no changes over the course of the previous week in the technical charts drawn below. The green lines remain the daily index movements, while the yellow lines are the trading ranges that have been drawn based on the index movements of the past several weeks. The red line on the VIX chart remains the 52-week average level of the VIX.

There was a noticeable divergence in performance last week among the three major US indexes as the Dow continued to rocket higher, driven by earnings reports, while the NASDAQ stumbled. The Dow (upper right pane above) is clearly the winner in terms of technical strength as it has chalked up 10 days in a row of posted gains. The S&P 500 (upper left pane above) has been muddling through, moving in a sideways fashion over the course of the past week and a half. The NASDAQ (lower left pane above) has been continually moving lower and ended last week slightly above the upper edge of its most recent trading range. The VIX (lower right pane above) saw a choppy trading week, but in the end closed out the week very close to where it started. Aside from the Dow, both the S&P 500 and the NASDAQ look to be forming a classic topping pattern where they quickly increase a significant amount then fall back to sideways or slightly negative performance. We will have to wait and see if the trend continues or if the strength of the Dow is enough to pull the other US indexes along.

 

Hybrid model performance and update

For the trading week ending on 8/4/2017, returns in the hybrid and quant hypothetical models* (net of a 1% annual management fee) were as follows:

 

Last Week 2017 YTD Since 6/30/2015
Aggressive Model -0.29% 6.82% 12.60%
Aggressive Benchmark 0.35% 12.18% 11.97%
Growth Model -0.15% 6.26% 11.08%
Growth Benchmark 0.27% 9.46% 9.63%
Moderate Model -0.04% 5.17% 9.03%
Moderate Benchmark 0.20% 6.79% 7.18%
Income Model -0.01% 4.75% 8.39%
Income Benchmark 0.11% 3.55% 4.04%
Quant Model -0.37% 11.72%
S&P 500 0.19% 10.63% 20.05%

*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 several of the individual equity holdings continued to report earnings. Overall, earnings season has been mixed for the stocks owned in the models with no glaring issues being reported. Commodity prices will continue to have an impact, either positive or negative, on several of the large holdings, as will Amazon’s continued move into the retail sector of the US economy.

 

Market Statistics:

 

The US markets were mixed last week with earnings reports being the primary driver of performance:

 

Index Change Volume
Dow 1.20% Average
S&P 500 0.19% Average
NASDAQ -0.36% Above Average

 

Volume last week was primarily driven by earnings announcements with the NASDAQ seeing the highest volume on a relative basis of the three major US indexes. Apple, Illumina and Tesla reporting results, and the ensuing movements on their respective stocks, was enough to push the index into above average volume for the week. In terms of performance, the Dow saw the best performance last week, thanks to a boost from Apple and 3M, which were both up more than four percent or more over the course of the week. The S&P 500, which saw the largest percentage of companies report earnings last week, came in right in the middle as most of the earnings that came in were close to expectations.

 

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

 

Top 5 Sectors Change Bottom 5 Sectors Change
Home Construction 2.50% Natural Resources -1.40%
Regional Banks 2.03% Biotechnology -1.94%
Telecommunications 1.91% Pharmaceuticals -2.33%
Utilities 1.84% Oil & Gas Exploration -3.56%
Financial Services 1.73% Semiconductors -3.63%

 

As with most things last week in the financial markets, earnings were the primary driver behind the sector movements seen last week. Toll Brothers and Lennar both moving more than 2 percent drove the gains in home construction (a very small sector of the market in terms of the number of companies within it). Financials, specifically Regional Banks and Services, made the top five list last week thanks to earnings and the expectations that the Fed will likely have an increasingly challenging time raising rates again in 2017. Telecommunications’ gain last week was on the back of Sprint, Verizon and T-Mobile gaining between 2.5 and 5.8 percent during the week. On the flip side last week, earnings hit Semiconductors hard, while a relatively small move in the price of oil to the downside seemed to have a magnified impact on Oil and Gas Exploration and Natural Resources overall. Biotechnology and Pharmaceuticals also made the bottom five performing sectors last week as industry giant Teva Pharmaceuticals declined by more than 30 percent after reporting worse than expected earnings and lowering its full year 2017 guidance.

 

Fixed income investments in the US were positive last week as fixed income traders continue to move around their positions in anticipation of what the Fed will do next:

 

Fixed Income Change
Long (20+ years) 1.06%
Middle (7-10 years) 0.26%
Short (less than 1 year) 0.02%
TIPS 0.16%

Global currency trading volume was average last week overall, as the US dollar gained some momentum following the Bank of England’s decision and statement. Overall, the US dollar increased 0.25 percent against a basket of international currencies. The best performing of the global currencies last week was the Venezuelan Bolivar, as it gained 1.4 percent against the value of the US dollar. The worst performance among the global currencies was the South African Rand, which declined 3.1 percent against the US dollar.

Commodities were mixed last week as Oil moved slightly lower:

Metals Change Commodities Change
Gold -0.86% Oil -0.39%
Silver -2.72% Livestock 0.54%
Copper 0.27% Grains -4.58%
Agriculture -1.40%

The overall Goldman Sachs Commodity Index declined 0.55 percent last week, driven by the movement in the price of grains. It was nice to finally see the index move for a reason other than oil. Oil had a tame week ahead of the OPEC meeting this week, falling only 0.39 percent as traders seem to be taking a pause before deciding which way to move the price of oil following the conclusion of the two-day OPEC meeting, at which production cuts are likely to be discussed at length. Metals were mixed last week with Gold and Silver declining 0.86 and 2.72 percent, respectively, while Copper bucked the trend and posted a gain of 0.27 percent for the week. Soft commodities were mixed last week with Grains and Agriculture posting declines of 4.58 and 1.4 percent respectively, while livestock managed to increase 0.54 percent for the week.

Top 2 Indexes Country Change Bottom 2 Indexes Country Change
BUX Hungary 2.59% PSEi Philippines -1.72%
FTSE MIB Italy 2.36% Tel Aviv Israel -2.36%

Last week was a positive week for global financial markets, with 79 percent of the global markets posting gains. The best performing index last week was found in Hungary with the BUX exchange posting a gain of 2.59 percent for the week. The worst performing index last week was found in Israel and was the Tel Aviv Index, which turned in a loss of 2.36 percent for the week.

While there was some movement in the VIX last week, there was nothing as exciting as hitting the lowest point ever (like two weeks ago) or spiking upward by 40 percent or more (which we have seen in the past). Overall, last week was a slow week for the VIX. For the week, the VIX declined by 2.24 percent down to 10.03. The current reading of 10.03 implies that a move of 2.90 percent is likely to occur over the next 30 days. As always, 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, with the highlights of the week being related to the US employment situation. There was a single release that significantly missed market expectations and none that significantly beat expectations:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Slightly Negative 7/31/2017 Chicago PMI July 2017 58.9 61.3
Negative 8/1/2017 Personal Income June 2017 0.0% 0.4%
Neutral 8/1/2017 Personal Spending June 2017 0.1% 0.1%
Neutral 8/1/2017 PCE Prices June 2017 0.0% 0.1%
Neutral 8/1/2017 PCE Prices – Core June 2017 0.1% 0.1%
Neutral 8/1/2017 ISM Index July 2017 56.3 55.2
Neutral 8/2/2017 ADP Employment Change July 2017 178K 190K
Slightly Negative 8/3/2017 ISM Services July 2017 53.9 57.0
Slightly Positive 8/4/2017 Nonfarm Payrolls July 2017 209K 187K
Slightly Positive 8/4/2017 Nonfarm Private Payrolls July 2017 205K 180K
Neutral 8/4/2017 Unemployment Rate July 2017 4.3% 4.3%

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

 

Last week, the economic news releases started on Monday with the release of the Chicago PMI for the month of July, which came in below expectations, but stayed well above the inflection point of 50, which marks growth versus contraction in manufacturing. On Tuesday, personal income and spending for the month of June were released, with income falling well short of the 0.4 percent increase as it posted a reading of 0.0. Personal spending was not much better, coming in at 0.1 percent growth for the week, but this was expected and had minor impact on the overall markets. PCE Prices were also released on Tuesday, coming in as expected at 0.1 percent, continuing to show anemic inflation in the US economy. Later during the day on Tuesday, the overall ISM for the month of July was released, coming in very close to market expectations. On Wednesday, the first of the employment related figures for the month of July was released, as the ADP employment change figure posted a weaker than expected reading of 178,000 jobs created during the month. On Thursday, the services side of the ISM was released, slightly missing market expectations in a sign that consumer spending could finally be adversely impacting the economy. On Friday, the focus of the economic news releases was the overall US unemployment rate, but there was much more than just the single figure to evaluate. Overall US unemployment went down to 4.3 percent from 4.4 percent, matching the lowest point in the past 16 years. Both nonfarm payroll figures also turned in strong figures, with both being over the 200,000 level. The not so positive news out of the employment report on Friday was that average hourly earnings saw a very slow 0.3 percent increase, the U6 unemployment rate stayed at 8.6 percent and the labor force participation rate came in at 62.9, significantly below long run averages. Overall last week, the economic data was mixed with both positive and negative easily found. One thing that remained clear last week is that the Fed could have a tough time raising rates if inflation remains to stubbornly low, which consumer spending and PCE prices both pointed to last week.

 

This week is a slow summer week for economic news releases with only a few releases related to inflation on the docket. The releases with the greatest potential to impact the markets are highlighted in green below:

 

Date Release Release Range Market Expectation
8/10/2017 PPI July 2017 0.20%
8/10/2017 Core PPI July 2017 0.20%
8/11/2017 CPI July 2017 0.20%
8/11/2017 Core CPI July 2017 0.20%

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

 

The economic news releases this week start on Thursday when the producer Price Index (PPI) for the month of July is released, both overall and core calculations. Inflation, as measured by the PPI, is expected to be running at 0.2 percent, which is well below the Fed’s desired inflation rate, but in line with what we have been seeing over the past several months. On Friday, the Consumer Price Index (CPI) for the month of July is set to be released with expectations of it also posting a very low reading of 0.2 percent for the month. While the market will likely not pay much attention to these releases with it being a slow summer trading week this week, there could be increased speculation about what impact, if any, these two sets of releases will have on the Fed’s future thinking of when to hike rates or when to commence the balance sheet shrinking program. While most of Washington DC is away on August recess, there are still Fed officials who are hard at work with 5 speeches being given this week by five different officials. The markets will look for any insight that can be gleaned from these speeches about the start of the Fed shrinking its balance sheet; other information from the speeches will largely be ignored.

 

Interesting Fact — The latest round of the debt ceiling fight is coming up

The US debt ceiling has been a political football that both sides of the aisle have used many times since 1980. In total, the debt ceiling has been increased 24 times since 1980 and we have witnessed the limit rise from just under $1 trillion to more than $19 trillion today.

 

Source: George Mason University http://www.mercatus.org