For a PDF version of the below commentary please click here Weekly Letter 8-22-2016

Commentary quick take:

 

  • Major developments:
    • Second slow week of trading in a row last week
    • Markets seemed to lack overall direction
    • Mixed signals on manufacturing in the US
    • Earnings season is almost complete

 

  • Earnings season for the second quarter is now more than 95% complete:
    • Wal-Mart turned in a solid quarter and raised outlook
    • Outlook is less positive at Target
    • Forward looking guidance overall (Q3 and beyond) is still negative

 

  • Fed Minutes for July released:
    • Split Fed seen
    • Increased chance of rate hike this year
    • Foreign concerns still driving some Fed thinking

 

  • Europe:
    • Italian banking health being questioned
    • Italian referendum vote looming

 

  • Market statistics:
    • Global markets were mixed last week
    • Volume remains very low
    • VIX is back at lowest level seen in more than two years

 

  • Technical market view:
    • Rally appears to have stalled for the indexes
    • New ranges have been drawn on the index charts

 

  • Hybrid investments strategy update:
    • Increased defensive positioning
    • Earnings season continues to drive stock performance

 

  • This week for the markets:
    • Jackson Hole Fed Summit

 

  • Interesting Fact: What can you do in 114 seconds?

 


Major theme of the markets last week: Italian Banks

Funny 8-22-16

Trouble at some of Europe’s oldest financial institutions in Italy seemed to be a major theme for the global financial markets last week. Accounting issues brought to light last week combined with continued weakness in the sector overall have global investors once again watching Europe very closely. Similar to Greece’s need for multiple bailouts over the past several years, it is becoming increasingly clear that the Italian banks are in real trouble and will need a combination of bailout funds, and potentially some bail-in funds, to pull through. The latest round of European bank stress tests did not help the situation in Italy as many banks failed various capital requirements under very generous stress tests. The banks in Italy are leaning; it is now just a matter of time to see which banks will be able to correct their leaning ways and which will ultimately fall.
US news impacting the financial markets:

 

The news last week was dominated by the latest release of the FOMC meeting minutes for the month of July and by the final few companies that released their second quarter earnings results, including Wal-Mart and Target. On Wednesday last week, the minutes from the previous FOMC meeting were released and showed that the US Federal Reserve is indeed very fractured in terms of its thinking about when to increase interest rates. The Fed split included one member that “preferred to raise the target range for the Federal funds rate at the current meeting,” referring to the last meeting held in July. There were also a few other Fed officials that see the timing of the rate hike as being almost upon the Fed as the fallout from the Brexit vote remains very muted and growth in the labor market has rebounded after the unexpected drop a few months ago. One thing that was focused on in the meeting minutes is that the Fed will await data to confirm that it is time to increase rates. Inflation in particular is running well below the Fed’s target two percent, as it has been for a number of years. The chart below from the St. Louis Fed FRED data system shows the Fed’s most reliable measure of inflation, the Personal Consumption Expenditure (PCE) Index excluding food and fuel, for the past 5 years with the red line being drawn at the 2 percent annual level.

PCE 8-22-16

As you can see, we have not seen a two percent rate of inflation on the PCE index since May of 2012. If the Fed is really waiting on this rate to hit 2 percent, it could be waiting a long time. One final interesting aspect of the meeting minutes from last week is that non-voting members of the FOMC seem to be in favor of increasing rates sooner rather than later, but without them having a vote at the upcoming meetings it seems unlikely the group will have enough power to sway voting members toward their thinking. Taking all of the information into account from the minutes last week, we did see the odds of a Fed rate hike during 2016 finally make it up to 53 percent, as measured by the CBOE’s Fed Watch table, shown to the right. This is the first time in many months that the odds of a rate hike have been above 50 percent by the end of the year. We may learn more about the Fed’s thinking this week as many Fed officials and central bankers from around the world attend the annual Jackson Hole symposium.

fed watch 8-22-16

Jackson Hole, Wyoming is the unlikely location of a Federal Reserve symposium every year that is very closely monitored by Wall Street as there is a closing address by the Chair of the Federal Reserve and numerous research papers and ideas are shared across the different sessions. Previously, some major changes in Fed policy have been discussed and ultimately adopted from discussions held in Jackson Hole. This year, one of the two main focal points of the meeting will likely be monetary policy and whether it is having the desired impact on the global markets and the second will likely be a discussion on inflation or the lack of inflation currently seen in the US. There has been a lot of talk around the world recently about the impact of Central Bank stimulus and if it is having any of the desired outcomes or if it is merely forming bubbles in various asset classes that could ultimately prove to be more costly than the problems being temporarily fixed through stimulus measures. With the general lack of inflation being seen here in the US, it seems that target inflation rates and measurement of inflation will be hotly debated topics this year as changes in the way the Fed looks at inflation could change the future for monetary policy going into the future. As the markets get ready to watch the Jackson Hole summit later this week, they will also be digesting the very last of the earnings season for 2016, which is quickly coming to a close with a small group of retailers posting their results this week, similar to last week.

 

Retailers continued to be the focal point for earnings releases last week as many of the big name stores posted earnings. Below is a table of the well-known companies that released earnings last week with earnings that missed expectations highlighted in red, while earnings that beat expectations by more than 10 percent are highlighted in green:

 

Advance Auto Parts -11% Foot Locker 3% Staples 0%
Agilent Technologies 4% Hain Celestial Group pushed Stein Mart -14%
Cisco Systems 5% Home Depot 1% Sysco 7%
Cree -14% Hormel Foods 6% Target 8%
Deere & Co 63% Jack Henry & Associates 33% TJX Companies 5%
Dick’s Sporting Goods 21% Lowe’s Companies -4% Tuesday Morning 25%
Estee Lauder 8% Ross Stores 6% Wal-Mart Stores 5%

 

Retailers were the focal point for the markets last week in terms of earnings announcements as some of the largest retailers in the world saw very different quarters. Target and Wal-Mart both released their second quarter earnings results last week with both beating expectations, but having very different outlooks on the coming quarter and remainder of 2016. Target announced first last week and beat expectations, but saw overall sales growth slowing in the second quarter and for the remainder of the year. Wal-Mart, on the other hand, saw sales increasing during the quarter and increased its overall guidance for 2016. Slower foot traffic and more dependence on online sales were a major theme from both Target and Wal-Mart last week as well as from TJ Maxx and Macy’s. Macy’s is taking particularly drastic measures as the company announced it would be closing 100 brick and mortar stores in the near future, which amounts to 14 percent of its total stores. All of the big stores cited online competition as both a potential problem and opportunity going forward. Wal-Mart took the biggest step of the week in the space when it announced it was acquiring jet.com, an online marketplace, so that Wal-Mart can try to better compete with Amazon. Home Depot and Lowe’s rounded out the major retailers last week with both companies seeing increased foot traffic and sales as both sell items that are typically more difficult to shop for online.

 

According to Factset Research, we have seen 477 (95 percent) of the S&P 500 companies release their results for the second quarter of 2016. Of the 477 that have released, 71 percent have beaten earnings estimates, while 10 percent have met expectations and 19 percent have fallen short of expectations. When looking at revenue of the companies that have reported, 54 percent of the companies have beaten estimates, while 46 percent have fallen short. When compared to previous quarters, the figures above are slightly below the 1-year average and slightly above their respective 5-year averages, meaning the second quarter of 2016 is seeing earnings per share and revenues per share that are just okay in terms of meeting or beating market expectations. The year-over-year change in overall earnings does not look good, however, as we are seeing a year-over-year change in earnings of -3.2 percent. When looking to the third quarter of 2016, there have been 102 companies that have issued forward looking guidance, with 72 issuing negative guidance 30 issuing positive guidance. The retail sector has been one of the main culprits for issuing negative guidance during the second quarter as most see the landscape ahead as very challenging with the economic and political uncertainty that will play out over the third and fourth quarters of 2016.

 

Second quarter earnings season is down to a small group of late reporting retailers, for the most part. This is the final week for a table of upcoming companies to report earnings. The table below shows the companies that have the greatest potential to move the markets highlighted in green:

 

Best Buy Express Sears
Big Lots GUESS? Splunk
Burlington Stores J M Smucker Tiffany & Co
Dollar General Michaels Companies Williams-Sonoma

 

Retailers will be the focal point for earnings announcements this week with both high-end and discount chains releasing their earnings. Dollar General typically sees about the same performance as Wal-Mart in terms of spending trends so we will likely see a beat from that company. Higher end stores like Tiffany & Co and Williams-Sonoma will likely have felt some pressure during the second quarter from slower foot traffic in their stores, leaving their results up to how their online sales were for the quarter. Splunk is always closely followed by Wall Street as this is one of a very few public big data-focused companies and a true bellwether for the quickly growing industry.

 

Global news impacting the markets:

 

There was not much in terms of global news that impacted the financial markets last week as it seemed the world was captivated by the Summer Olympic Games and summer holidays, but Italy did make a few headlines and they were not very positive. Three weeks ago I shared that the figure for the average historical returns during the modern Summer Olympic Games on the Dow was a 1.8 percent gain. With the games being closed last night, the return for the Dow during the 2016 Summer Games was 1.09 percent, so slightly below average, but still a positive return. On a more serious note, the Italian banking system seems to be coming under more and more pressure to reform some of its less than ideal practices. Following the results of the European bank stress tests released about two months ago, it was widely known that the Italian banking system is having trouble with bad loans and poor assets being carried on their books. To make matters worse, Italy will now be holding a referendum on constitutional reforms that were central to Prime Minister Matteo Renzi’s campaign platform in 2014. The vote is scheduled to occur before the end of the year and if the reforms are not passed, the current government may be forced to resign and snap elections called, once again changing the regime in Italy. This will potentially add to the uncertainty facing global investors as they try to understand the risks currently being taken on by the banking system in Italy. We have already seen one major vote in Europe not turn out as expected this year with the Brexit, so it is not very far-fetched to say we may be surprised once again this year, and this time by Italy. With Italy being one of the pillars of the European Union and on the Euro, any small problems could quickly become big problems for Europe.

 

Technical market review:

 

All three of the major US indexes look to currently be range bound. The charts below show each of the three major indexes, plus the VIX, drawn with green lines. The blue lines represent the closest level of support for each of the indexes, established by points the markets have touched in the past prior to bouncing higher. The red lines on the three major indexes have been redrawn this week as the closest level of the resistance for each of the indexes based on their recent highs. For the VIX, the red line remains the rolling 52-week average level of the VIX.

4 charts combined 8-22-16

The trading ranges of the three major indexes are relatively narrow, as can be seen by how close the red and blue lines above are drawn. There is not much technical strength in these new trading ranges for the indexes as both the Dow and the S&P 500 (top two charts) look like they have essentially run out of steam after moving up very fast back in late June and early July. The charts of these two indexes are showing signs of exhaustion as the movements higher are becoming smaller and being done with less volume as bullish investors are getting tired of pushing the markets higher. The NASDAQ (lower left pane above) has been on a steadier upward trajectory for the past four weeks, but even this movement has to slow down as the annualized rate of return the NASDAQ has been moving at since July 12th is more than 45 percent, which is entirely unsustainable in the current economic environment. While the indexes have been enjoying upward movement, the VIX has been pushing lower and last week set a new low point for the year and the lowest reading that we have seen going all of the way back to July of 2014.

 

Market Statistics:

 

The markets turned in a lackluster trading week last week as the 2016 summer trading season starts to draw to a close:

 

Index Change Volume
NASDAQ 0.10% Below Average
S&P 500 -0.01% Below Average
Dow -0.13% Below Average

 

Volume remained below average across all three of the major US indexes as there were obviously a lot of East Coast Wall Street investors still taking some summer holidays. Even the meeting minutes from the Fed for the July meeting failed to cause much excitement during the directionless trading seen in the markets. With the second quarter earnings announcements almost completely finished, this week looks like it too could be a very slow week for the global financial markets as there are few scheduled announcements or events that could push the markets. As mentioned above, all eyes will be on Jackson Hole this week, but even this is unlikely to provide enough concrete information for the markets to actually adjust their thinking about the Fed’s upcoming rate decisions.

 

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

 

Top 5 Sectors Change Bottom 5 Sectors Change
Oil & Gas Exploration 3.27% Consumer Service -0.82%
Semiconductors 2.52% Healthcare Providers -1.12%
Energy 2.31% Utilities -1.52%
Technology 2.07% Residential Real Estate -2.03%
Broker Dealers 1.95% Telecommunications -2.52%

With oil booking its second week in a row of more than 6 percent gains, it was not surprising to see Oil and Gas Exploration as well as Energy overall take two of the top three spots in terms of sector performance last week. Semiconductors also enjoyed a bit of a risk-on trade, as did Technology overall. Financial Broker Dealers rounded out the top five sectors last week. All five of the bottom performing sectors of the markets last week are classified as risk-off sectors of the markets, meaning they are typically seen as some of the safest sectors of the markets. Maybe it was investors reading into the Fed minutes that a rate hike could be coming sooner rather than later or maybe it was just investors booking some profits, but whatever the reason, the “safest” areas of the markets declined the most last week.

Fixed income markets were negative here in the US last week as the odds of a Fed rate hike coming this year pushed higher:

Fixed Income Change
Long (20+ years) -0.98%
Middle (7-10 years) -0.46%
Short (less than 1 year) 0.02%
TIPS -0.09%

Currency trading volume was below average last week, just like the equity indexes, due to summer trading being in full swing. Overall, the US dollar decreased by 1.33 percent against a basket of foreign currencies. The strongest of the major global currencies last week was the Swiss Franc, as it advanced by 1.50 percent against the value of the US dollar. Some of the strength of the Franc could be due to the building of fears over the Italian banking system, which seems to be on very unsure footing. The worst performance of the global currencies for the second week in a row was the Australian Dollar as it declined by 0.34 percent against the value of the US dollar.

Commodities were mixed last week, as oil moved notably higher on rumors:

Metals Change Commodities Change
Gold 0.45% Oil 8.00%
Silver -1.98% Livestock -0.92%
Copper 1.80% Grains 2.44%
Agriculture 0.77%

The overall Goldman Sachs Commodity Index gained 4.48 percent last week, as Oil increased 8 percent. Much of the move in Oil continued to be due to rumors that the informal meeting of OPEC in Algiers later this month could yield an actual production freeze. A deputy Saudi oil minister last week came out with a statement saying he was unaware of any production freeze talks, which further fueled the markets into thinking the talks were actually happening, in a bit of backwards logic. No one knows for sure if talks of a production freeze are occurring or not, but one thing is for certain and that is if there is a production freeze there is no way that all of the OPEC members will be held to the deal as members of the group are notorious for cheating and circumventing agreements to try to gain market share against other members. The major metals were mixed last week with Gold gaining 0.45 percent and Silver moving lower by 1.98 percent. Copper pushed higher for the week by 1.80 percent. Soft commodities were mixed last week with Agriculture overall gaining 0.77 percent, while Livestock fell 0.92 percent and Grains advanced 2.44 percent over the course of the week.

Top 2 Indexes Country Change Bottom 2 Indexes Country Change
Merval Argentina 2.85% IBEX 35 Spain -3.05%
Shanghai Composite China 1.88% FTSE MIB Italy -4.05%

Last week saw only 26 percent of the major global markets turn in positive performance for the week. The best performing index last week was found in Argentina and was the Merval index, which turned in a gain of 2.85 percent for the week. The worst performing index for the week was found in Italy and was the FTSE MIB Index, which turned in a loss of 4.05 percent. Italian banks were the catalyst for the majority of the declines seen in the Italian index last week as there are now ongoing investigations into the financial record keeping of some of the biggest banks in Italy, on top of poor showings in the latest round of European bank stress tests. Some pundits have called the Italian banks the next major test for the EU as the looming implosion seems almost inevitable, but it seems unlikely that such a relatively small banking system like Italy has the punch to once again bring into question the EU as whole.

The VIX turned in a relatively small move last week for the second week in a row, falling only 1.82 percent for the week. With the decline last week giving back all of the gains from two weeks ago we once again find the VIX ending last week at the lowest level that we have seen since July of 2014. The current reading of 11.34 implies that a move of 3.27 percent is likely to occur over the next 30 days. Once we get through summer trading and some of the large market movers come back from summer vacations, we may see a bit of an uptick in the VIX as there are fewer and fewer reasons for the market to continue to push higher in a low volatility fashion.

For the trading week ending on 8/19/2016, returns in the hybrid hypothetical models* (net of a 1% annual management fee) were as follows:

  Last Week 2016 YTD Since 6/30/2015
Aggressive Model -0.01 % 3.77 % 8.23 %
Aggressive Benchmark -0.20 % 4.75 % -0.58 %
Growth Model -0.10 % 3.99 % 7.46 %
Growth Benchmark -0.15 % 3.82 % -0.21 %
Moderate Model -0.16 % 4.13 % 6.98 %
Moderate Benchmark -0.11 % 2.84 % 0.05 %
Income Model -0.24 % 4.55 % 7.29 %
Income Benchmark -0.05 % 1.55 % 0.24 %
S&P 500 -0.01 % 6.85 % 5.85 %

*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 only one change to the models over the course of the previous week and that was to initiate a short (hedging position) to help protect the models in the event of a downturn in the markets. The recent rally in the markets has been running for a very significant amount of time given the general lack of positive catalysts. We are also at or very near all-time high levels across all three of the major US indexes; the good times cannot continue to roll indefinitely. At the start of last week several of my signals about the health of the markets starting to falter began to switch from green to yellow, meaning that caution is needed, but not that a large decline was directly on the horizon. I initiated an inverse position on the S&P 500 (goes up when the S&P 500 goes down and down when the S&P 500 goes up) in the Income, Moderate and Growth models as a first step toward protecting the models. The second step has yet to trigger, but can be put in place very quickly should the conditions warrant. While adding to defensive positioning last week, I was also closely watching several sectors of the markets to see if there was a good entry point, areas such as healthcare and biotechnology that are still presenting interesting investment opportunities.

 

Economic Release Calendar:

 

Mixed signals out of the manufacturing sector last week gave the markets some uncertainty over the recovery that had been seen over the previous few months. Last week was a typical summer week in terms of the number of releases, with most of the releases coming in very close to market expectations:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Negative 8/15/2016 Empire Manufacturing August 2016 -4.2 4
Neutral 8/16/2016 CPI July 2016 0.00% 0.00%
Neutral 8/16/2016 Core CPI July 2016 0.10% 0.20%
Neutral 8/16/2016 Housing Starts July 2016 1211K 1167K
Neutral 8/16/2016 Building Permits July 2016 1152K 1153K
Neutral 8/17/2016 FOMC Minutes Previous Meeting NA NA
Slightly Positive 8/18/2016 Philadelphia Fed August 2016 2 0.5

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

 

The economic news releases last week started on Monday with a poor reading on the Empire Manufacturing index for the month of August. Expectations had been for a low reading of 4.0, signaling that manufacturing was continuing to expand during the month of August in the greater New York City area. However, the results came in showing that a contraction in manufacturing actually occurred in the region during August. This contraction now brings into question the gains in manufacturing seen on the index during June and July. On Tuesday the Consumer Price Index (CPI) for the month of July was released and showed that prices at the consumer level, much like prices at the producer level shown two weeks ago, are almost perfectly flat, showing no sign of inflation. This lack of inflation was one of the topics brought up last week, both in the Fed meeting minutes as well as in various Fed officials’ speeches. The housing starts and building permit figures released later in the day on Tuesday came in close to expectations and largely echoed the same sentiment that was seen in the earnings results of Home Depot and Lowe’s, discussed above the earnings section. On Wednesday the US Federal Reserve released the meeting minutes from the July meeting, at which it decided not to increase interest rates, which showed a much divided Fed on the timing of another interest rate hike, discussed further in the national news section above. Last week the economic news releases wrapped up on Thursday with the release of the Philadelphia Fed Index, which showed an expansion in business activity and manufacturing in the greater Philly area during the month of August. This report seemed to contradict the Empire index released earlier during the week, leaving the markets waiting for further manufacturing data to be released in the coming weeks before deciding the current situation in the manufacturing sector across the US.

 

This week is a typical summer trading week, with the primary focus of the week being the second estimate of GDP for the second quarter of 2016. The releases that could impact the markets are highlighted in green below:

 

Date Release Release Range Market Expectation
8/23/2016 New Home Sales July 2016 580K
8/24/2016 Existing Home Sales July 2016 5.5 Million
8/25/2016 Durable Orders July 2016 3.5%
8/25/2016 Durable Orders, Ex-Transportation July 2016 0.4%
8/26/2016 GDP – Second Estimate Q2 2016 1.1%
8/26/2016 University of Michigan Consumer Sentiment Index August 2016 90.8

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

 

This week the economic news releases start on Tuesday with the release of new home sales for the month of July, which are expected to be slightly lower than they were in June, thanks to the slowing down in the home buying season. On Wednesday, existing home sales for the month of July are set to be released with expectations of 5.5 million units having been sold during the month, again a little lower than in June due to the cyclical buying season. On Thursday, the durable goods orders for the month of July are released, both overall orders and orders excluding transportation, which can be very volatile due to the large cost of airplanes and seemingly random buying schedules by the airlines around the world. Both of the expected order numbers, if they come to fruition, would represent a nice rebound from the contraction in orders we saw in June. If we see a second month of declines in orders it would be a negative sign for the US economy, but a positive signal for the Fed having to keep interest rates lower for longer. On Friday, the second estimate of Q2 2016 GDP here in the US is set to be released. The first estimate released a month ago posted a reading of 1.2 percent, much lower than Wall Street had been expecting. This time around, expectations are for a downward revision, but only a small one, taking the reading down to 1.1 percent. The real key in this release for determining how the market will react is the underlying reason for the change from the 1.2 percent first estimate reading. Wrapping up the week on Friday this week is the release of the University of Michigan’s Consumer Sentiment Index for the month of August (final estimate) and it is expected to have not changed much from the mid-month reading released two weeks ago. In addition to all of the above scheduled economic news releases, the markets will be closely watching the Jackson Hole Fed symposium, as mentioned above in the nation news section, as many members of the Fed will be speaking and taking part in various discussions that could impact the global markets.

 

Interesting Fact World’s fastest man is hanging up his Olympic track shoes.

 

Usain Bolt finished his final Olympic race last week, winning his ninth gold medal in nine attempts at the past three Summer Olympic Games. According to the BBC, Bolt’s combined Olympic Final running times to win those 9 gold medals are a mere 114 seconds, or slightly less than 2 minutes of running. His top speed at the Olympics was just about 25 miles per hour. If he could sustain that speed he could run the distance from the earth to the moon in a little over 404 days.

 

Source: http://www.BBC.com

 

For a PDF version of the below commentary please click here Weekly Letter 8-15-2016

Commentary quick take:

 

  • Major developments:
    • Very slow week of trading last week
    • Markets digested a lot of economic data
    • Poor PPI and retail sales figures here in the US
    • Earnings season is almost complete

 

  • Earnings season for the second quarter is now more than 91% complete:
    • Retailers are in the spotlight once again
    • Earnings growth on a year-over-year basis is -3.3 percent

 

  • China:
    • Poor import and export figures for July
    • Hopes of new government action

 

  • Europe:
    • Slower than expected growth seen
    • Germany continues to carry other countries
    • Brexit still a big unknown

 

  • Market statistics:
    • Global markets pushed higher
    • US markets saw a trifecta for the first time since 1999
    • Volume was painfully low

 

  • Technical market view:
    • All three indexes extended their upward run
    • Rally looks like it is starting to stall out

 

  • Hybrid investments strategy update:
    • No major changes to the models last week
    • Flower Foods drove a lot of volatility last week
    • Earnings season continues to drive stock performance

 

  • This week for the markets:
    • Wal-Mart earnings results
    • Everyone is waiting on the Fed meeting in Jackson Hole

 

  • Interesting Fact: How often does a 2,168 year old record fall?

 


Major theme of the markets last week: All-time highs all around

funny 8-15-16

Despite last week’s volume being some of the lowest that we have seen in a number of years, the US markets managed to make headlines, having successfully pulled off a US market trifecta. A market trifecta occurs when all three of the major US indexes make a new all-time high on the same day. This occurred on Thursday last week after months of the NASDAQ trying to catch up to the Dow and the S&P 500. Does this mean the markets will continue to move higher in perpetuity? Potentially, but the markets currently look a bit stretched out as we have yet to have a meaningful correction (for the better part of 5 years). We are more likely in the very late stages of a bull market rally than in the early stages and the risks in the current market remain elevated, even if standard measures of risk such as the VIX seem to be indicating otherwise.
US news impacting the financial markets: US news that had an impact on the US financial markets focused last week on poor economic figures as well as the dwindling announcements about second quarter earnings season. Almost all of the economic news releases released last week came in below market expectations, as both retail sales for the month of July and prices at the producer level pointed to a slowing down in the US economy. The markets have recently been very keen on the economic news releases as everyone tries to figure out when the FED is likely to increase rates. With seemingly every new economic news release, that time frame appears to be pushed further and further away. Last week it was deflationary signals out of the producer price index that showed that prices declined at the producer level during the month of July, the opposite of the 2 percent target inflation rate the Fed has set. With prices coming down, the normal action for the Fed to take, all else being equal, would be to lower the Fed funds rate in an effort to stimulate prices by pushing more money into the economic system. This price decrease combined with the no growth or contraction in retail sales (negative for retail sales excluding autos in July) also adds to the hardship being imposed on the Fed. With all of the negative economic data, the likelihood of a Fed rate increase at any time during the remainder of 2016 declined last week, as shown in the table to the right. However, we are still not seeing the chance of a rate decrease creep back into the cards, as we saw about a month and a half ago. In addition to moving with the expectations of the Fed moving on rates, last week the markets were driven by the earnings results from some of the major retailers here in the US. We are drawing ever closer to the end of second quarter 2016 earnings reporting.

fed watch 8-15-16

The start of retailers releasing their earnings occurred last week. In general, it was pretty good for both the higher-end and lower-end stores. 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:

 

Dean Foods -3% Macy’s 35% SolarCity 5%
Dillard’s 3% Nordstrom 22% Sotheby’s 44%
Flowers Foods 0% Ralph Lauren 19% Tyson Foods 13%
J C Penney 67% Red Robin Gourmet Burgers -5% Walt Disney 1%
Kohls 17% Shake Shack 8% Wendy’s 11%

 

High-end retail companies easily beat market expectations during the second quarter of 2016 according to the releases that came out last week. Nordstrom, Macy’s, Ralph Lauren and Sotheby’s all beat expectations by more than 20 percent. Even the discount retailers got in on the act with JC Penney and Kohl’s beating expectations handedly. Red Robin and Dean Foods were the only two companies on the above table that missed market expectations, but the misses did not spill over into other food retailers such as Wendy’s and Tyson Foods. Flower Foods met analyst expectations for the quarter, but saw its stock price decline last week, thanks to several other factors as discussed below in the model update section of this newsletter.

 

According to Factset Research, we have seen 457 (91 percent) of the S&P 500 companies release their results for the second quarter of 2016. Of the 457 that have released, 70 percent have beaten earnings estimates, while 11 percent have met expectations and 19 percent have fallen short of expectations. When looking at revenue of the companies that have reported, 54 percent of the companies have beaten estimates, while 46 percent have fallen short. When compared to previous quarters, the figures above are slightly below the 1-year average and slightly above their respective 5-year averages, meaning the second quarter of 2016 is seeing earnings per share and revenues per share that are just okay in terms of meeting or beating market expectations. The year-over-year change in overall earnings does not look good, however, as we are seeing a year-over-year change in earnings of -3.5 percent. This is better than the expectations of -5.5 percent we saw going into the reporting season, but still represents the fifth consecutive quarter of year-over-year declines in earnings. At this point in the earnings season for the second quarter of 2016 it is becoming increasingly difficult for the numbers to change by a material amount since such a large percentage of the companies in the indexes have already reported their results.

 

This week is the last of the meaningful weeks for earnings results for the second quarter of 2016; the last of the major retailers are set to release their earnings. The table below shows the companies that have the greatest potential to move the markets highlighted in green:

 

Advance Auto Parts Foot Locker Staples
Agilent Technologies Hain Celestial Group Stein Mart
Cisco Systems Home Depot Sysco
Cree Hormel Foods Target
Deere & Co Jack Henry & Associates TJX Companies
Dick’s Sporting Goods Lowe’s Companies Tuesday Morning
Estee Lauder Ross Stores Wal Mart Stores

 

All eyes this week will be on releases from big box retailers Wal-Mart and Target, the two largest retail chains in the US. Wal-Mart, the world’s largest private employer, will likely be very closely followed for any trends the company is seeing in consumer spending, which according to the latest retail sales figures could be lower than first thought. With Wal-Mart touching so many different areas of the country and socioeconomic tranches, it has perhaps the best and most accurate data about consumer spending. Wal-Mart’s results will undoubtedly be compared to Target’s results and it is no coincidence that they release their results close to the same time as other discount retailers such as TJ Maxx and Ross. In general, higher-end retailers seemed to have had a pretty good second quarter, which is likely what occurred at the lower-end retail stores as well. With that in mind, results from these discount retailers will likely be a little better than anticipated by the markets. Other retail-focused companies the markets will be watching very closely this week are Home Depot and Lowe’s, as the two are the main home improvement stores in the US and provide some insight into the average American’s thoughts about the US real estate market. In general, people will fix up and renovate their homes if they think they will be able to get more from selling their homes in the future with the changes than if they did not improve their homes. If people think the housing market will be going down in the near term, they typically hold off on making many improvements as they are unsure about their future returns on the work being done.  The final company that will be closely watched by Wall Street this week is Deere & Co as the company makes a wide variety of high-dollar machinery. We will have to see if the slowdown in various parts of the world has hurt Deere’s bottom line or if consumers are still purchasing the company’s equipment.

 

Global news impacting the markets: Global news last week was very mixed as the markets around the world focused on economic news releases and data points, trying to gauge the chance of further central bank stimulus around the world. In China, the data was very mixed as exports were shown to have increased by 2.9 percent in the month of July when compared to one year prior. However, this seemingly positive news was more than offset with the import data figures released at the same time, which showed imports declining by 5.7 percent on a year-over-year basis. Both of the above figures are on a local currency basis. When looked at in terms of constant US dollars, exports decreased 4.4 percent, while imports dropped 12.5 percent. Either way you look at the import and export data out of China, it is very difficult to see how the economy overall is increasing at the 6 plus percentage rate the country is targeting in 2016. In addition to weak import and export figures, China also released poor industrial production figures for the month of July, as manufacturing and mining came in weaker than expected. The Chinese stock market moved higher last week, however, as investors seemed to think that all of the poor economic data released would push the People’s Bank of China (PBOC) to take further action to try to stimulate the economy, either through an interest rate cut or some other stimulus measure. China was not the only part of the world that saw weakness in its data; Europe also released some weaker than expected data.

 

Last week Eurostat released its latest reading for the GDP growth rate in the Eurozone for the second quarter of 2016, which came in at 0.3 percent, only half of the growth rate it saw during the first quarter, which was 0.6 percent. Digging a little deeper into the data released by Eurostat last week, it is easy to see that Europe still has the problem of a two-speed growth rate economy with Germany expanding and growing, but finding that carrying countries such as France and Italy has become increasingly strenuous. In the same report from Eurostat, the group raised the possibility of further downward revisions to future GDP growth rates for the region overall. Remember that the data for the second quarter that was released last week was almost fully representative of the context preceding the Brexit vote. Adding the uncertainty over what will happen with the Brexit going forward could do nothing but lower the expected growth rates all around Europe.

 

Technical market review:

 

Last week we saw something occur that had not happened since late 1999. According to Bespoke, it was December of 1999 that we saw all three of the major US indexes close at new all-time high levels, as they did on Thursday of last week. The charts below show each of the three major indexes, plus the VIX, drawn with green lines. The blue lines represent the closest level of support for each of the indexes, established by points that the markets have touched in the past prior to bouncing higher. The red line on the NASDAQ depicts the closest resistance level, as represented by points that have been tested on each index several times in the last 6 months. There are no red lines on the Dow of the S&P 500 charts as both indexes continue to push higher into uncharted waters. For the VIX, the red line remains the rolling 52-week average level of the VIX.

4 charts combined 8-15-16

I kept the above charts the same in terms of the horizontal lines drawn on each chart as volume was so low last week that I will give the indexes one more week to confirm the new trading ranges that appear to be forming by the movements of the past two weeks. In general terms, all three of the indexes are exhibiting about the same level of technical strength and thus there is no clear leading index. While the three major US indexes pushed a little higher last week, so too did the VIX, which moved off of the lowest levels that we have seen in the past two years last week, ending the week slightly higher than it started, gaining 1.4 percent.

 

Market Statistics:

 

Last week was a typical summer trading week in terms of movement for the markets as they were generally lacking direction with were very few developments that had noticeable impacts on the overall markets:

 

Index Change Volume
NASDAQ 0.23% Below Average
Dow 0.18% Way Below Average
S&P 500 0.05% Below Average

 

Volume last week was in full summer trading mode, but even this does not fully explain the very low volume seen on the Dow. The volume seen last week for the Dow was the lowest weekly volume that we have seen since Christmas week 2013. Much of this lack of volume is being attributed to the summer trading season as well as the lack of any major news, earnings or new announcements, about any of the Dow 30 component members. While both the NASDAQ and the S&P 500 also experienced below-average levels of volume last week, neither was as far below on a relative basis than the Dow. With such low volume on the broad indexes here in thse US last week, one has to take the market movements that were seen with a grain of salt as there were very few investors participating in the movement.

 

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

 

Top 5 Sectors Change Bottom 5 Sectors Change
Oil & Gas Exploration 2.20% Financial Services -0.95%
Energy 1.96% Basic Materials -1.01%
Industrials 1.78% Regional Banks -1.47%
Natural Resources 1.70% Biotechnology -1.60%
Consumer Staples 1.49% Telecommunications -2.40%

With oil prices moving by more than six percent last week it was not surprising to see that Oil and Gas Exploration and Energy took the top two spots in terms of sector performance; any time oil has a big week these are the two sectors that see the greatest benefit. Consumer Staples making the list of the top five performing sectors last week was interesting as this sector is rarely in the top five during a week that sees the overall indexes move higher. Consumer Staples is typically a very defensive sector and performs the best on a relative basis during weeks when the markets push lower. On the negative side of sector performance last week, Telecommunications and Biotechnology took the bottom two spots as earnings reports by several key players in each sector hurt overall performance. Financial related sectors made up two of the five bottom performing sectors as the economic data seems to be signaling more weakness on the horizon in the US economy.

Fixed income markets were positive here in the US last week as the odds of a Fed rate hike coming this year pushed lower:

Fixed Income Change
Long (20+ years) 1.51%
Middle (7-10 years) 0.45%
Short (less than 1 year) 0.01%
TIPS 0.33%

Currency trading volume was below average last week, just like the equity indexes, due to summer trading being in full swing. Overall, the US dollar decreased by 0.52 percent against a basket of foreign currencies. The strongest of the major global currencies last week was the Swedish Krona, as it advanced by 1.59 percent against the value of the US dollar. The worst performance of the global currencies for the second week in a row was the British Pound as it declined by 1.26 percent against the value of the US dollar, thanks to continued uncertainty over the future of the UK in light of the Brexit vote having taken place and article 50 being invoked at some point around the end of 2016.

Commodities were mixed last week, as oil moved notably higher on rumors:

Metals Change Commodities Change
Gold -0.12% Oil 6.49%
Silver 0.05% Livestock 0.32%
Copper -1.17% Grains 0.60%
Agriculture -1.05%

The overall Goldman Sachs Commodity Index gained 2.69 percent last week, as Oil increased 6.49 percent. Much of the move in Oil, which officially entered a bear market two weeks ago, was due to rumors that the informal meeting of OPEC in Algiers later this month could yield an actual production freeze. This seems like a long shot, but the rumor is all the markets seemed to need to move higher. Remember that back in February a rumored production freeze made oil prices gain more than 40 percent in a short period of time, ending what had been an 18-month bear market in oil. If OPEC can get the price of oil to increase by just starting a rumor about a production freeze it could be very interesting to watch the oil market react if a production deal was actually reached. The major metals were mixed last week with Gold falling 0.12 percent and Silver moving higher by 0.05 percent. Copper pushed lower for the week by 1.17 percent. Soft commodities were mixed last week with Agriculture overall falling 1.05 percent, while Livestock advanced 0.32 percent and Grains advanced 0.60 percent over the course of the week.

Top 2 Indexes Country Change Bottom 2 Indexes Country Change
Nikkei 225 Japan 4.1% OMX Copenhagen Denmark -1.9%
DAX Germany 3.3% Merval Argentina -1.5%

Last week saw 93 percent of the major global markets turn in positive performance for the week. The best performing index last week was found in Japan and was the Nikkei 225 index, which turned in a gain of 4.1 percent for the week. Maybe the latest round of Abenomics could actually help Japan, even if it is highly unlikely to do so. The worst performing index for the week was found in Denmark and was the OMX Copenhagen Index, which turned in a loss of 1.9 percent.

The VIX turned in a relatively small move last week, gaining only 1.4 percent for the week. The move helped push the index off of the lows of 2016, but not by much as the VIX remains at very low levels. The current reading of 11.55 implies that a move of 3.34 percent is likely to occur over the next 30 days. As we get closer to the end of the year, if the Fed projects that it is no longer considering increasing rates by the end of the year, we could see the VIX move upward as this would be an admittance of weakness in the US economy, weakness that is currently not being priced into the movement of the markets over the coming 30 days, which is the time length that the standard VIX measures.

For the trading week ending on 8/12/2016, returns in the hybrid hypothetical models* (net of a 1% annual management fee) were as follows:

  Last Week 2016 YTD Since 6/30/2015
Aggressive Model -0.73 % 3.78 % 8.24 %
Aggressive Benchmark 1.18 % 4.96 % -0.39 %
Growth Model -0.33 % 4.09 % 7.57 %
Growth Benchmark 0.92 % 3.98 % -0.06 %
Moderate Model 0.03 % 4.30 % 7.15 %
Moderate Benchmark 0.65 % 2.95 % 0.16 %
Income Model 0.21 % 4.80 % 7.55 %
Income Benchmark 0.33 % 1.60 % 0.29 %
S&P 500 0.05 % 6.85 % 5.86 %

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

 

There were no changes in the hybrid models last week as they remain defensively positioned in light of the recent market movements. The largest driving force (more than 60 percent of the downside) in the models last week came from a single stock, Flower Foods, as the company released its second quarter earnings results and updated its guidance for the full year 2016. Second quarter earnings for Flower Foods came in as expected, hitting analysts’ expectations exactly, but the company did lower its guidance for the remainder of the year as it continues to struggle with fully integrating the Hostess Wonder bread lines it purchased from a bankruptcy auction a few years ago. The company sees softer demand and increased promotional costs for the second half of 2016 as it tries to grow into more of the all-natural lines of its business, areas that take a lot more advertising dollars than its well established brands because of competition from regional, smaller bakers. The company will still easily be profitable in 2016, but is on my watch list to see how management performs in the face of adversity. If the company makes many missteps going forward, it will be sold and a new position initiated in the stock models, but given management that has shown strong fortitude in the past, the opportunity to succeed remains significant and continued investment seems the most prudent course of action.

 

Economic Release Calendar:

 

Last week was a slow, normal week regarding the number of releases, but the releases that came out were almost all below market expectations:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Slightly Negative 8/12/2016 PPI July 2016 -0.40% 0.00%
Slightly Negative 8/12/2016 Core PPI July 2016 -0.30% 0.20%
Negative 8/12/2016 Retail Sales July 2016 0.00% 0.40%
Negative 8/12/2016 Retail Sales ex-auto July 2016 -0.30% 0.20%
Neutral 8/12/2016 University of Michigan Consumer Sentiment August 2016 90.4 90.2

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

 

Friday was the only day of the week last week that held any meaningful economic news releases with the producer price index (PPI), retail sales and the latest consumer sentiment index all being released. Up first on Friday was the PPI for the month of July, which came in at a -0.4 percent overall and a -0.3 percent for the core PPI components. With prices at the producer level declining it presents a very difficult situation for the Fed as it would like to be increasing rates, but that typically places downward pressure on prices. The retail sales figures released on Friday also did not make the Fed’s decision as to when to increase rates any easier, as sales were perfectly flat overall and declined by three tenths of a percent when auto sales were removed from the calculation. Both of these figures had been expected to show small, but still positive readings. Without an increase in spending, the US economy is likely to slow down even more, which begs the question of whether the Fed should even be considering increasing rates or be thinking more about when to lower rates back to the zero bound. The final release of the week came in the form of the University of Michigan’s Consumer Sentiment index for the month of August, which came in with a reading of 90.4, while the market had been expecting 90.2. With the release being so close to market expectations there was little reaction from the markets.

 

This week is a typical summer trading week, with the primary focus of the week being the Fed minutes from the previous meeting. The releases that could impact the markets are highlighted in green below:

 

Date Release Release Range Market Expectation
8/15/2016 Empire Manufacturing August 2016 4
8/16/2016 CPI July 2016 0.00%
8/16/2016 Core CPI July 2016 0.20%
8/16/2016 Housing Starts July 2016 1167K
8/16/2016 Building Permits July 2016 1153K
8/17/2016 FOMC Minutes Previous Meeting NA
8/18/2016 Philadelphia Fed August 2016 0.5

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

 

This week the economic news releases start on Monday with the release of the Empire manufacturing index for the month of August, which is expected to post a solid gain with a reading of 4, well above the all-important level of zero. If we see this release dip below zero it could be a problem for the overall manufacturing sector here in the US. On Tuesday, the consumer Price Index (CPI) for the month of July is set to be released with expectations of a very low reading of inflation. If these releases are anything like the PPI released last week we could see both dip into negative territory, which would increase the pressure on the Fed to not raise interest rates. Also released on Tuesday are the latest housing starts and building permit figures, both for the month of July and both expected to show a reading over 1.1 million units during the month. If these expectations are realized it would be a positive development for the overall health of the housing market here in the US. On Wednesday the meeting minutes from the July meeting of the FOMC are set to be released, but as usual all of the pertinent information is already known so it is highly unlikely that we see something new in the minutes that the markets actually react to. Wrapping up the week on Thursday this week is the release of the Philadelphia Fed index, which will be closely watched to see if the results fall in line with the Empire Manufacturing index released earlier during the week. These two manufacturing related indexes could move the overall markets for the week if they either both beat or miss expectations. In addition to the scheduled economic news releases there are also four members of the Federal Reserve giving speeches throughout the week that could hold new information about the current thinking regarding the timing of the FOMC increasing rates.

 

Interesting Fact It is not very often that a 2,168 year old record falls.

 

On Thursday night last week, US swimmer Michael Phelps won his 13th individual Olympic title, breaking a record that had stood since 125 BC and was held by legendary runner Leonidas of Rhodes. The record was once thought to be a record that could not be touched in the age of modern Olympics because of how much a single athlete would have to dominate a sport over an extended period of time. Leonidas, however, never won any medals as the prizes for the Olympics during his time included an olive wreath, glory and a few large jars of olive oil.

 

Source: www.npr.org

For a PDF version of the below commentary click here Weekly Letter 8-8-2016

Commentary quick take:

 

  • Major developments:
    • Japanese Government turn at stimulus
    • Bank of England surprised the markets
    • Jobs reports in the US were good
    • Earnings season drawing to a close

 

  • Earnings season for the second quarter is now more than 86% complete:
    • So far, better than expected
    • Technology continues to be the standout sector
    • Earnings growth on a year over year basis is -3.3 percent

 

  • Japan:
    • Japanese government underwhelmed with the latest stimulus plan
    • More government lending than spending in the plan
    • Little chance of new plan making a difference

 

  • Bank of England:
    • Cut interest rate to 0.25 percent
    • Increased bond purchases
    • Hinted a future rate cut
    • Lowered domestic outlook

 

  • Market statistics:
    • Global markets pushed higher
    • VIX pushed lower; now at the lowest point we have seen in more than two years

 

  • Technical market view:
    • All three indexes extended their upward run
    • NASDAQ finally broke out to the upside of its range and made a new all-time high

 

  • Hybrid investments strategy update:
    • Slightly defensively positioned
    • No major changes to the models last week
    • Earnings season continues to drive stock performance

 

  • This week for the markets:
    • Summer trading will continue
    • Retail sales could impact markets on Friday

 

  • Interesting Fact: Olympic history

 


Major theme of the markets last week: Japan just keeps on trying

funny 8-8-16

funny2 8-8-16

 

After the Bank of Japan (BOJ) underwhelmed the markets two weeks ago with its plan to push money into the financial market in an attempt to boost the Japanese economy and get inflation moving toward its targeted 2 percent rate, it was the government’s turn to announce its part of the plan last week and it too underwhelmed the markets. Abenomics (the economic stimulus package first released under Prime Minster Shinzo Abe) is once again mutating as the failure of the first several iterations of the plan is becoming glaringly obvious. Japan has been trying to get out of an economic slump that has lasted the better part of the last 26 years. So far, the country has failed to come up with any economic plans that have actually worked for a significant period of time. Most of the plans that have been released have worked for a short period of time, but have ultimately been too little, too late. Will the latest package actually be the break-through package that will right the ship in Japan? It is highly unlikely, but at least Japan keeps trying and hoping as the global economy picks up around Japan, which remains the third largest economy in the world.
US news impacting the financial markets: There were only two major themes in the US news last week that moved the markets: the jobs reports that came out on Friday and the continuation of second quarter earnings season. Throughout the week last week the US financial markets seemed to be waiting with baited breath for the employment reports released on Friday. They were being dubbed as reports that could potentially change the thinking of the US Federal Reserve when analyzing its timing for increasing interest rates. The reports released on Friday can be broken down into three major sections: the unemployment rate, the payroll numbers and all of the other data that was released. The overall unemployment rate in the US was shown to have remained steady at 4.9 percent, as shown in the 5-year chart from Tradingeconomics to the right. Unemployment rate 8-8-16We have seen a slow and steady decrease in the unemployment rate here in the US over the past 5 years, but that decrease seems to be tapering off as we have essentially moved in a sideways direction since the third quarter of 2015. Both of the payroll figures (public and private) handedly beat market expectations for the second month in a row on Friday, posting more than 215,000 new jobs during the month, far outpacing the 170,000 and 181,000 jobs that were expected. But even with all of that new hiring we still barely saw an uptick in the labor force participation rate, which is depicted to in the chart from Tradingeconomics to the left.labor force 8-8-16 You can see in the chart that we have seen virtually no recovery in the labor force participation rate since it started to fall in earnest after 2008. We are currently at levels that have not been seen since the late 1970’s and early 1980’s. One of the largest contributing factors to the labor force participation rate remaining so low is the fact that there has been very little wage growth. In the labor report on Friday, average hourly earnings were shown to have only increased 0.3 percent during the month of July, well below the level that would likely entice some people back into the labor market. Overall, the labor market picture here in the US was slightly improved after all of the releases of Friday were fully analyzed. This was most directly seen in the Fed watch numbers posted by the CBOE, which showed increased chances of a rate hike at each of the next four meeting of the FOMC, following the release of the jobs data.  However, the odds of a rate hike by the end of the year remain below 50 percent. fed watch 8-8-16The markets may get a little more clarity about the timing of the next rate hike later this month with the Kansas City Fed holding its annual symposium in Jackson Hole, Wyoming. Until that gathering the markets will likely just be guessing at various data points for clues as to when the Fed may next increase rates. In addition to all of the employment related information released on Friday, earning announcements continued to be released by many well-known corporations last week.

 

Last week the earnings reports released primarily focused on consumer goods and services. Below is a table of the well-known companies that released earnings last week with earnings that missed expectations highlighted in red, while earnings that beat expectations by more than 10 percent are highlighted in green:

 

Aetna 5% First Data 4% Owens & Minor 6%
Allstate 17% Henry Schein 1% Pfizer 3%
AmerisourceBergen 9% Herbalife 10% Procter & Gamble 7%
Archer Daniels Midland -7% Humana 2% Prudential Financial -26%
Avon Products 133% Intercontinental Exchange 1% Red Lion Hotels 500%
Ball 6% Iron Mountain -11% SeaWorld Entertainment -9%
Caesars Entertainment 0% Jack In The Box 23% South Jersey Industries -8%
Cardinal Health 1% Kate Spade -21% Tesla Motors -33%
CenturyLink 7% Kellogg 1% Time 38%
Church & Dwight 8% Liberty Media 109% Time Warner 11%
Clorox -2% LinkedIn 200% Transocean 1800%
Cummins 12% Molson Coors Brewing -3% Western Union 5%
CVS Health 2% Noodles & Co -50% Xcel Energy -5%
Denny’s 0% Office Depot -50% Zillow Group -444%

 

The company that beat expectations by the most last week was Transocean, which bested expectations by 1,800 percent. While this may sound very impressive, it is a little less impressive when you consider that expectations were so low that posting earnings of $0.17 per share actually does work out to being a 1,800 percent beat. Tesla was another company last week that made some headlines when it released its latest earnings report. The company missed expectations by a lot and announced that it needed $1.1 billion in cash to finish the gigafactory in Nevada before it could ramp up production of the model 3 sedan. Despite the poor performance and the potential need to raise funding in the near term, the stock only declined by 2 percent for the week, showing just how resilient some investors can be when they think a company is on to the next big innovative technology. Other companies such as Sea World and Kate Spade were not so lucky last week when they missed expectations and were pushed lower by more than 14 percent by investors.

 

According to Factset Research, we have seen 431 (86 percent) of the S&P 500 companies release their results for the second quarter of 2016. Of the 431 that have released, 69 percent have beaten earnings estimates, while 12 percent have met expectations and 19 percent have fallen short of expectations. When looking at revenue of the companies that have reported, 54 percent of the companies have beaten estimates, while 46 percent have fallen short. When compared to previous quarters the figures above are slightly below the 1-year average and slightly above their respective 5-year averages, meaning that the second quarter of 2016 is seeing earnings per share and revenues per share that are just okay in terms of meeting or beating market expectations. The year over year changes in overall earnings does not look good, however, as we are seeing a year-over -year change in earnings of -3.5 percent. This is better than the expectations of -5.5 percent that we saw going into the reporting season, but still represents the fifth consecutive quarter of year-over-year declines in earnings. This slow and steady decline in earnings is typically a precursor to harder economic times in the coming years.

 

There is a large drop off this week in the number of well recognized companies that are releasing their earnings. The table below shows the companies that have the greatest potential to move the markets highlighted in green:

 

Dean Foods Macy’s SolarCity
Dillard’s Nordstrom Sotheby’s
Flowers Foods Ralph Lauren Tyson Foods
J C Penney Red Robin Gourmet Burgers Walt Disney
Kohl’s Shake Shack Wendys

 

Retailers make up the majority of companies, releasing their results this week as retail always brings up the end of a quarterly reporting season. We have results from both high end retailers such as Macy’s, Nordstrom and Dillard’s this week as well as discount retailers such as JC Penney and Kohl’s. Typically, one of the two groups outperforms the other, with discount retailers doing better when the US economy is not performing well and the higher end retailers doing better when the US economy is performing very well. With the GDP numbers that have been coming out recently showing very slow growth it seems the discount retailers could be favored this quarter for doing better than the higher end retailers. Walt Disney is also a good barometer for the US economy since the company is very well diversified through movies, toys and amusement parks. During a typical quarter, movies are the component that drive the largest surprises in earning for the company; this may be the case again this quarter as well.

 

Global news impacting the markets: Japan and England once again made headlines last week as they deal with essentially the same troubled economic growth projections in the future. Japan went first last week as Prime Minister Shinzo Abe announced some of the details of a plan he had alluded to three weeks ago during a random speech in Tokyo. After the BOJ disappointed the markets with a relatively small new buying program that included purchasing ETFs and other financial instruments, while leaving interest rates alone two weeks ago, there was a lot of hope that the government in Japan would announce big plans to make up for the short fall. However, last week the government announced a stimulus package worth about $274 billion, but only about $75 billion in actual new spending by the government with the balance coming in the form of new and increased government lending. The problem with the plan is that lending is not the problem in Japan; it is that the money that is lent is not being used to its full potential in the economy. Japan is seeing most of the lent money being saved by individuals and corporations or being used to pay off debts. Japan is greatly lacking what is known as the velocity of money, which is the number of times a dollar lent circulates through the economy. Velocity is created when people use a dollar to purchase goods and services and the people who make the dollar turn around and spend it, with the cycle being repeated several times, although the amount becomes smaller with each cycle as a percentage is saved along the way. If the lent money is saved in full, the velocity of money is immediately and essentially one and it does not help the economy much at all. To add insult to injury, the $75 billion in actual new spending will be spread over the next 2 years. With the announcement of the plan in Japan, the Nikkei immediately dropped by more than 2 percent as it saw little chance of this plan actually helping. This adverse reaction was somewhat offset later in the week as the Bank of England stepped up and took some bold steps in trying to help its economy as the country is still trying to figure out the potential impact of the Brexit vote.

 

On Thursday last week the Bank of England (BOE) took the unexpected step of cutting its key interest rate by 0.25 percent from 0.5 percent down to 0.25 percent. This was the first time the BOE had cut interest rates since March of 2009 at the height of the global Great Recession, at which time it was merely following the US Fed’s path of cutting rates. The BOE also said it was very likely that interest rates may be cut further in the near future if it doesn’t see the current plan having the desired effects. The BOE was not done with just the rate cut last week, however. It also announced an increase in asset purchases, a new system of making sure rate cuts are passed on to borrowers (so the banks don’t just make higher margins) and further government purchases of corporate bonds. Why did the bank do all of this? All of the actions taken by the BOE last week were a direct result of the negative impact seen in the British economy as a result of the Brexit. Last Thursday, the BOE also released its latest projections for growth in the economy, cutting the 2017 growth forecast from 2.3 percent down to 0.8 percent and lowering 2018 from 2.3 percent down to 1.8 percent. The British pound pushed lower against all of the major foreign currencies on the announcement as it now looks like we could be starting to watch a two horse race to the bottom of the currency battle between the BOE and the BOJ.

 

Technical market review:

 

Last week we finally saw the NASDAQ break out to the upside from its most recent trading range as the index made a new high on August 5th following a strong rally. While the NASDAQ remains a bit weaker than the other two major US indexes, it was nice to see it finally push high enough to join the other two indexes in making a new all-time high. The charts below show each of the three major indexes, plus the VIX, drawn with green lines. The blue lines represent the closest level of support for each of the indexes, established by points that the markets have touched in the past prior to bouncing higher. The red line on the NASDAQ depicts the closest resistance levels, as represented by points that have been tested on each index several times in the last 6 months. There are no red lines on the Dow of the S&P 500 charts as both indexes continue to push higher into uncharted waters. For the VIX, the red line remains the rolling 52-week average level of the VIX.

4 charts combined 8-8-16

As mentioned above, the NASDAQ (lower left pane above) managed to break out of its trading range and make it to a new all-time high late last week, but the index still remains the weakest over a one year time frame in terms of technical strength. On a three weak time frame, the NASDAQ is technically stronger than the other two indexes as it has continued to push higher as both the S&P 500 (upper left pane above) and the Dow (upper right pane above) have stalled out and largely moved in a sideways manner. While the indexes were moving higher last week the VIX kept searching for a floor as it moved lower, ending the week at the lowest level we have seen since July 16th of 2014. Complacency remains in place in these markets when looking at the risk being assigned by the VIX levels, something that can lead investors not paying attention to be very surprised by a spike in volatility.

 

Market Statistics:

 

Last week was a good week for technology and a mediocre week for all other areas of the financial markets as we saw the NASDAQ outperform the other two main indexes for the third week in a row:

 

Index Change Volume
NASDAQ 1.14% Average
Dow 0.60% Slightly Below Average
S&P 500 0.43% Below Average

 

In aggregate, volume last week on the broad US based equity indexes was below average with the main driving force behind the volume that we did see being earnings announcements, but we are in the middle of summer trading so there is not much to be read into in the lack of volume.

 

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

 

Top 5 Sectors Change Bottom 5 Sectors Change
Regional Banks 2.95% Infrastructure -0.70%
Biotechnology 2.71% Healthcare Providers -0.96%
Financial Services 2.60% Residential Real Estate -2.23%
Broker Dealers 2.30% Utilities -2.57%
Oil & Gas Exploration 2.07% Telecommunications -3.10%

Financials performed well, taking three of the top five sectors when looking at performance last week as interest rates remained low here in the US last week and moved lower in England and Australia with central bank rate cuts. Biotechnology took the second spot in terms of performance thanks to a few mergers and earnings results. It would have been the top performer had it not been for a more than 15 percent decline in Bristol-Myers Squibb (BMY) on Friday after the announcement of a drug failure by the company for a cancer drug under consideration by the FDA. With the prospects of higher interest rates here in the US increasing, it was not surprising to see that interest rate sensitive sectors of the market turned in the worst performance of the week last week. These sectors include Utilities, Telecommunications, Real Estate and Infrastructure, all of which are defensive sectors.

Fixed income markets were negative last week as bond traders and investors reacted to the weak plan from Japan and the strong plan out of England:

Fixed Income Change
Long (20+ years) -2.33%
Middle (7-10 years) -0.91%
Short (less than 1 year) -0.01%
TIPS -0.62%

Currency trading volume was above average last week, thanks to movements in the Yen and the Pound. Overall, the US dollar increased by 0.85 percent against a basket of foreign currencies. The strongest of the major global currencies last week was the Australian dollar, as it advanced by 0.26 percent against the value of the US dollar. The worst performance of the global currencies was the British Pound as it declined by 1.23 percent against the value of the US dollar, thanks to the increased spending by the government and the lower interest rate set by the BOE.

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

Metals Change Commodities Change
Gold -1.11% Oil 1.02%
Silver -3.31% Livestock 1.78%
Copper -3.17% Grains -2.13%
Agriculture 1.60%

The overall Goldman Sachs Commodity Index gained 1.15 percent last week, as Oil increased 1.02 percent. At the start of the week last week oil did move lower, pushing the liquid gold into official bear market territory, which is a decline of more than 20 percent from the most recent high. After hitting bear market territory buyers seemed to be willing to jump back in, pushing oil higher for the week overall. The major metals were all negative last week with Gold falling 1.11 percent and Silver moving lower by 3.31 percent. Even Copper broke from recent trends and moved in the same direction as the precious metals, falling 3.17 percent for the week. Soft commodities were mixed last week with Agriculture overall gaining 1.6 percent, while Livestock advanced 1.78 percent and Grains declined 2.13 percent over the course of the week.

Top 2 Indexes Country Change Bottom 2 Indexes Country Change
Jakarta Composite Indonesia 3.9% OMX Copenhagen Denmark -2.5%
WIG Poland 3.1% Caracas General Venezuela -2.6%

Last week saw 45 percent of the major global markets turn in positive performance for the week. The best performing index last week was found in Indonesia and was the Jakarta Composite index, which turned in a gain of 3.9 percent for the week. The worst performing index for the week was found in Venezuela and was the Caracas General Index, which turned in a loss of 2.6 percent. With increased political tension in Venezuela it appears the financial index for the country will likely continue to deteriorate, even if the price of oil recovers some of the 20 percent decline that we have seen in recent weeks.

The VIX continued to push lower last week, breaking through the lowest point we had seen this year.  With a decline of only 4.04 percent, the VIX last week managed to break out of its most recent trading range that had been in place since early July. The current reading of 11.39 implies that a move of 3.29 percent is likely to occur over the next 30 days. It is interesting that as the chance of a rate hike by the Fed increased last week, we did not see the VIX increase as a hike by the Fed would undoubtedly increase the volatility in the global financial markets. Some of the lack of movement in the VIX last week could be that the odds of a rate hike remain low in the near term and only increase to about 50 percent for the December meeting, which is well beyond the 30 day forward look that the standard VIX is based on.

For the trading week ending on 8/5/2016, returns in the hybrid hypothetical models* (net of a 1% annual management fee) were as follows:

  Last Week 2016 YTD Since 6/30/2015
Aggressive Model -0.15 % 4.53 % 9.03 %
Aggressive Benchmark -0.11 % 3.73 % -1.55 %
Growth Model -0.23 % 4.43 % 7.92 %
Growth Benchmark -0.09 % 3.03 % -0.97 %
Moderate Model -0.30 % 4.26 % 7.12 %
Moderate Benchmark -0.05 % 2.28 % -0.49 %
Income Model -0.37 % 4.57 % 7.31 %
Income Benchmark -0.03 % 1.27 % -0.04 %
S&P 500 0.43 % 6.80 % 5.80 %

*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. There was, however, some trading that took place in some accounts as positions that had gotten far away from target allocations were adjusted. In most cases, this rebalancing was selling some of the individual stock positions that had performed very well (gained in some cases 100 percent or more) and were more heavily weighted than they should have been. Partial positions remain in place in both small and mid-caps stock funds as we are waiting for a pull back to fill these positions. Other areas of the market that are being closely watched include biotechnology and healthcare.

 

Economic Release Calendar:

 

Last week was a fairly normal week for the number of releases, but the weight of the week was really on Friday with all of the jobs related information that was released:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Negative 8/1/2016 Construction Spending June 2016 -0.6% 0.7%
Neutral 8/1/2016 ISM Index July 2016 52.6 53.1
Neutral 8/2/2016 Personal Income June 2016 0.2% 0.3%
Neutral 8/2/2016 Personal Spending June 2016 0.4% 0.3%
Neutral 8/3/2016 ADP Employment Change July 2016 179K 165K
Neutral 8/3/2016 ISM Services July 2016 55.5 55.8
Positive 8/5/2016 Nonfarm Payrolls July 2016 255K 185K
Positive 8/5/2016 Nonfarm Private Payrolls July 2016 217K 171K
Neutral 8/5/2016 Unemployment Rate July 2016 4.9% 4.9%

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

 

Construction spending started off the economic news releases of the week last week and it was a real downer after posting a decline in spending of 0.6 percent, while the markets had been expecting a gain of 0.7 percent. The decline in construction spending was blamed on slower than anticipated private residential and nonresidential construction. With lower than expected construction spending for the month of June, it suggests that the first estimate of second quarter GDP may be revised lower in the upcoming revisions. Also released on Monday was the ISM index for the month of July, which came in close to expectations, easily remaining over the very important 50 level. On Tuesday, personal income and spending were both released with both showing small positive gains for the month of June. On Wednesday the ADP employment data was released and came in slightly better than expected, but not enough to cause any major revisions to expectations for the labor department’s figures released on Friday. On Friday, as discussed above in the national news section, the government released a trove of employment data about the month of July, which included a better than expected reading on both payroll figures and the official unemployment rate, with the unemployment rate staying at 4.9 percent thanks in part to an uptick in the labor force participation rate as well as recent college graduates officially joining the job market after having graduated from school during the month of June.

 

This week is a slower than usual summer trading week, with the primary focus of the week being the retail sales figures released on Friday. The releases that could impact the markets are highlighted in green below:

 

Date Release Release Range Market Expectation
8/12/2016 PPI July 2016 0.00%
8/12/2016 Core PPI July 2016 0.20%
8/12/2016 Retail Sales July 2016 0.40%
8/12/2016 Retail Sales ex-auto July 2016 0.20%
8/12/2016 University of Michigan Consumer Sentiment Index August 2016 90.2

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

 

There are no releases during the first four days of trading this week that could have a material impact on the overall financial markets. On Friday, the Producer Price Index (PPI) for the month of July is set to be released with expectations of zero overall increase and core prices having increased by 0.2 percent. Both of these figures are far below the government’s targeted inflation rate of 2 percent annually, which will make increasing rates all that much more difficult in the future. Retail sales for the month of July are also released on Friday with expectations that overall sales will have increased by 0.4 percent, while sales excluding auto sales will have increased by only 0.2 percent. With expectations of readings so close to zero we could see both of these figures print negative, which may actually be a positive thing for the equity markets because it would lower the chance of a Fed rate hike this year, which keeps cheap money here for longer. Wrapping up the week on Friday is the release of the University of Michigan’s Consumer Sentiment index for the month of August (first estimate), which is expected to show no change over the reading at the end of June. In an unusually quiet week this week, there are no scheduled speeches by any Feed officials. Maybe they are all taking the week off ahead of the overtime they will have to put in to attend the Jackson Hole Summit at the end of the month.

 

Interesting Fact Olympic history

 

The early Olympic Games were celebrated as a religious festival from 776 B.C. until 393 A.D., when the games were banned for being a pagan festival (the Olympics celebrated the Greek god Zeus). In 1894, a French educator Baron Pierre de Coubertin, proposed a revival of the ancient tradition, and thus the modern-day Olympic Summer Games were born.

 

Source: factmonster.com

For a PDF version of the below commentary click here Weekly Letter 8-1-2016

Commentary quick take:

 

  • Major developments:
    • Central bank decisions around the world moved markets
    • Oil narrowly missed entering a bear market
    • Dismal second quarter GDP figure
    • No US FOMC rate hike
    • Yet another stimulus plan from Japan

 

  • Earnings season for the second quarter is now more than 50% complete:
    • So far, better than expected
    • Technology has been leading the way
    • Energy and oil remain in the spotlight

 

  • US Federal Reserve July FOMC meeting:
    • No change in the Fed Funds rate
    • Several hawkish changes to the statement
    • Expectations increased for a rate hike toward the end of 2016 before the release of the dismal GDP revision

 

  • Japan:
    • Prime Minster Abe announced a new economic stimulus plan
    • Bank of Japan announced a smaller than expected monetary stimulus package
    • Yen continues to move toward ¥100 per $1

 

  • Market statistics:
    • Global markets pushed higher on low volume
    • VIX is now at the lowest point we have seen in more than two years

 

  • Technical market view:
    • All three indexes extended their upward run
    • NASDAQ is getting very close to breaking out of its trading range

 

  • Hybrid investments strategy update:
    • Slightly defensively positioned
    • Moved out of precious metals position
    • Earnings season continues to drive stock performance

 

  • This week for the markets:
    • European bank stress test results
    • Politics could start to impact the markets

 

  • Interesting Fact: Golden returns during Summer Olympics

 


Major theme of the markets last week: Central bank meetings and announcements

central bank cartoon

Last week the focus of the financial markets around the world were the central banks of the US and Japan. The cartoon above is very telling of the current situation of lower and lower interest rates and it is amusing that the cartoon is a recycled cartoon from early 2015. The only update needed to update the cartoon from last year is to move the limbo bar a little lower as rates globally have pushed further down into negative territory. This goes to show that we have now been in this predicament for a while and it looks as if rates may be moving even lower before they finally turn around and start to move in a more typical fashion. The big announcements that moved the markets last week came from the Bank of Japan (BOJ) and the US Federal Reserve’s FOMC meeting for the month of July, at which they decided to leave interest rates unchanged. As most investors and money managers get a sense of the global market, it is currently running on the life support (punch bowl) that central banks are providing. The problem has now become whether the easy money policy is further increasing dependency on government stimulus and whether we’re becoming more and more entrenched in this “new normal” environment.
US news impacting the financial markets: The US financial markets had a lot of different items to focus on last week, especially for a summer trading week. The first item was of course the July meeting of the FOMC, which took place on Tuesday and Wednesday, concluding with the release of a statement from the Fed that left interest rates unchanged. In looking at the statement, the market seemed to take the changes to the language as more hawkish (more likely to increase rates) than the Fed has been before, as several sentences about concerns going forward had been omitted this time around. The US markets took this announcement in stride, however, adjusting the chance of a rate hike higher at each of the remaining meetings of 2016. This was, however, before the second quarter GDP release by the government, which took place on Friday.

 

On Friday the government released the first estimate of second quarter GDP and it came in significantly below market expectations. Going into the release on Friday, expectations were for a GDP print of 2.6 percent, a nice increase over the latest reading for the first quarter of 2016, which was 1.1 percent. These expectations, however, did not come to fruition as the first quarter GDP estimate was revised downward from 1.1 percent down to 0.8 percent and the second quarter estimate came in at 1.2 percent rather than 2.6 percent. This was a major negative development and significantly outweighed the Fed statement in terms of when the market is thinking the Fed will be able to increase rates again. The table to the right shows the latest Fed watch numbers compiled by the CME. Directly following the release of the Fed statement on Wednesday, the odds of a rate increase in November and December both jumped above 50 percent. But thanks to the GDP figure released on Friday, both figures ended the week at a lower point than they started, with the odds of a rate hike now being well below 50 percent through the end of the year. The low reading for second quarter GDP was partially blamed on the decrease in inventory seen during the quarter and some pundits in the media pointed out that with a decline seen during the second quarter we are likely to see an increase in the next few quarters pushing GDP higher than expected. The GDP numbers are notoriously inconsistent and can be revised many times in the future, as we saw with the first quarter figure this week, but one thing is pretty clear: in order to hit the government forecast GDP growth rate (2 percent according to the latest Fed projections) for full year 2016 we would now have to have a stellar second half of the year and even then it is a long shot. If all of the uncertainty over the future of rates was not enough for the US financial media last week, we also had a number of key earnings releases come out during the week.

Fed watch 8-1-16

Last week earnings were all about technology companies and how well some of the giants did during the second quarter of 2016. However, there were plenty of other releases outside of the technology sector for the market to digest. 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:

 

Aflac 2% Colgate-Palmolive 1% Panera Bread 2%
Alphabet 8% ConocoPhillips -27% PG&E -30%
Altria 1% Dow Chemical 12% Phillips 66 3%
Amazon.com 56% Dr Pepper Snapple 5% Public Storage -2%
Amgen 4% Eastman Chemical -2% Raytheon 3%
Anthem 3% Exxon Mobil -36% Regal Entertainment -4%
Apple 2% Facebook 23% Simon Property 0%
Aptargroup 1% Ford Motor -13% Six Flags Entertainment -3%
Arthur J Gallagher 1% General Dynamics 6% Sprint 25%
ADP 3% Harley-Davidson 1% Texas Instruments 6%
Baker Hughes -50% Hershey 9% Twitter 27%
Boeing 50% J & J Snack Foods 7% Under Armour 0%
Bristol-Myers Squibb 3% Kimberly-Clark 3% United Technologies 10%
Buffalo Wild Wings 1% Marriott International 5% Valero Energy 6%
Cabela’s -3% MasterCard 7% Verizon 1%
Caterpillar 14% McDonald’s 5% Waste Management 4%
Chevron 55% New York Times -8% Whole Foods Market 0%
Coca-Cola 3% Northrop Grumman 4% Xerox 20%

 

Energy and oil companies made several headlines last week in regard to their earrings announcements, but Exxon made the largest splash as the company turned in its worst quarterly profits for the company since 1999. There were many factors that the company cited for the poor performance, including the wild fires in Canada, one time asset write downs and the persistently low oil prices. The pain of low oil prices was also felt last week in Baker Hughes and ConocoPhillips as both companies missed expectations by more than 25 percent. Bucking the trend in oil last week was Chevron, which beat analyst expectations by 50 percent, thanks in large part to $2.8 billion in upstream exploration impairments that were taken during the quarter. Technology giants were the other main focal point of earnings last week as Facebook, Amazon and Google all beat market expectations. This outperformance by the largest of large cap technology companies was what drove such strong performance in the NASDAQ index, when compared to both the Dow and the S&P 500 for the week.

 

According to Factset Research, we have seen 317 (63 percent) of the S&P 500 companies release their results for the second quarter of 2016. Of the 317 that have released, 71 percent have beaten earnings estimates, while 13 percent have met expectations and 16 percent have fallen short of expectations. When looking at revenue of the companies that have reported, 57 percent of the companies have beaten estimates, while 43 percent have fallen short. We are now past the half way mark for the second quarter earnings season and the numbers have improved a little when compared to where they started early during the reporting season. In terms of how these numbers compare to past figures, both revenues and earnings per share are above the 5-year average levels for each variable.  Some of the major themes that seem to be coming up in many of the quarterly results include the potential impact of the Brexit, currency movements and the price of oil. This coming week is the second busiest week for second quarter earnings, but now that we are past the halfway mark for the season it becomes increasingly difficult for the overall numbers for the quarter to change.

 

This week is the busiest week of the quarter for earnings being reported with more than 1,850 companies reporting results. The table below shows the companies that have the greatest potential to move the markets highlighted in green:

 

Aetna First Data Owens & Minor
Allstate Henry Schein Pfizer
AmerisourceBergen Herbalife Ltd Procter & Gamble
Archer Daniels Midland Humana Prudential Financial
Avon Products Intercontinental Exchange Red Lion Hotels
Ball Iron Mountain SeaWorld Entertainment
Caesars Entertainment Jack In The Box South Jersey Industries
Cardinal Health Kate Spade Tesla Motors
CenturyLink Kellogg Time
Church & Dwight Liberty Media Time Warner
Clorox LinkedIn Transocean
Cummins Molson Coors Brewing Western Union
CVS Health Noodles & Co Xcel Energy
Dennys Office Depot Zillow Group

 

Large healthcare related companies will be in the spotlight this week as Aetna, Cardinal Health, Humana, CVS and Pfizer all release their earnings. It will be interesting to see what, if anything, any of these companies have to say about the number of smaller companies opting to drop out of the Affordable Care Act for 2017. Tesla Motors will also come under a lot of scrutiny this week as investors eagerly await the shipment numbers of new cars during the second quarter, updates on the gigafactory being built in New Mexico and the second half of 2016 production and shipment guidance. Tesla is well behind its initial estimates and has to have a stellar second half of 2016 to hit its full year numbers at this point.

 

Global news impacting the markets: Global news last week that had the largest impact on the financial markets came from two very different sources: Japan and oil prices. On Wednesday, Japanese Prime Minster Shinzo Abe announced yet another economic stimulus plan to try to get the Japanese economy moving forward, but the announcement was very awkward as it came at the end of another speech and was not nationally televised like previous announcements. In total, the stimulus plan is supposed to be ¥28 trillion (about $265 billion), of which ¥13 trillion would be in fiscal measures, with the balance being run by the Bank of Japan (BOJ). Details of the plan were not included in the announcement. On Friday, the BOJ announced its portion of the plan, but the package was underwhelming as the bank effectively punted the bulk of the responsibility of the program back to the government to undertake in the form of spending. The BOJ announced that it would purchase ¥6 trillion worth of ETFs per year, an increase from its current plan of ¥3.3 trillion. The BOJ did not cut interest rates further into negative territory nor did it decide to increase its bond buying program. One of the main reasons for not increasing its bond buying program is because it knows that it is already pretty much a single player in the Japanese bond market as the BOJ holds more than one third of all outstanding Japanese government bonds. Expectations had been for a plan from the BOJ to announce a ¥13 trillion program; so when it did not, it left investors in Japan wanting more and pushing the Nikkei lower. All of this also had an inverse relationship for the Yen, which appreciated against the value of the US dollar. This appreciation is the exact opposite of what the government would like to see happen because when the value of the Yen is strengthened against the US dollar, it makes all of the exported goods from Japan more costly to importers such as the US. With Japan so heavily dependent on exports for its economy, the country cannot afford to have importing countries purchase less of its goods. All of these latest plans may be for naught in the end, as the plans are just the latest in a string of now 26 different stimulus plans that have been tried by Japan since 1990, none of which have really worked in the past.

 

Oil was the other major headline last week that impacted the global financial markets as the price of oil continued to slide around the world as the global over supply that has been in place for the last 18 months continues to build. In the beginning of June oil closed at $51.23 per barrel and as of the close on Friday oil was trading at $41.60, a decline of 18.8 percent. To officially be in a bear market, an asset has to decline by 20 percent from its peak, something oil looked dead set on testing as we would only need to see prices come down to $40.98 per barrel. If we once again move into a bear market for oil it would present an interesting dilemma for the Fed as it would be deflationary at a time when the Fed desperately needs prices to be increasing. It would also be a negative factor for the overall health of the US financial markets as the previous time oil really declined it took the markets down with it as uncertainty over oil related jobs and industries came into question during an already weak growth time period here in the US.

 

Technical market review:

 

The charts below show each of the three major indexes, plus the VIX, drawn with green lines. The blue lines represent the closest level of support for each of the indexes, established by points that the markets have touched in the past prior to bouncing higher. The red line on the NASDAQ depicts the closest resistance levels, as represented by points that have been tested on each index several times in the last 6 months. There are no red lines on the Dow of the S&P 500 charts as both indexes jumped higher, making new all time highs along the way. For the VIX, the red line remains the rolling 52-week average level of the VIX.

4 charts combined 8-1-16

There were no major changes in the technical landscape of the three US markets last week. Both the S&P 500 (upper left pane above) and the Dow (upper right pane above) remain much higher than their closest level of support. The NASDAQ finally made it up to its most recent level of resistance, but failed to push through and actually make it to breakout status. The VIX for its part last week did very little, bouncing near the lowest level we have seen so far during 2016, as investors seem to be thinking that the markets are unlikely to move much from their current levels without some unknown event occurring.

 

Market Statistics:

 

Last week was a good week for technology and a mediocre week for all other areas of the financial markets:

 

Index Change Volume
NASDAQ 1.22% Average
S&P 500 -0.07% Below Average
Dow -0.75% Below Average

 

With such strong results from a few key technology giants last week it was not surprising to see that the NASDAQ led the way higher, gaining more than 1 percent. If the performance of Google, Amazon and Facebook were not included in the index last week the NASDAQ would have turned in a negative return and the volume would have been below average. Earnings results were the primary driver last week on the S&P 500 and the Dow as well. A few key results really seemed to push the indexes lower for the week.

 

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

 

Top 5 Sectors Change Bottom 5 Sectors Change
Semiconductors 3.43% Transportation -1.50%
Biotechnology 3.04% Home Construction -1.66%
International Real Estate 2.38% Energy -2.41%
Medical Devices 2.28% Healthcare Providers -3.01%
Materials 2.12% Commodities -3.26%

With such a strong performance seen in technology last week across the board it was not surprising to see that two technology heavy sectors led the way higher in sector performance for the week. Semiconductors and Biotechnology are typically the best performing sectors of the market when the NASDAQ moves significantly higher and last week was no exception. With oil prices down more than 6 percent and poor earnings results from the majority of the major energy companies last week, it was not surprising to see that Commodities and Energy made up two of the bottom three sectors in terms of performance last week. A little concerning, the transportation sector made it into the bottom 5 performing sectors of the week last week, which is typically a sign of weakness to come in the overall US economy as transportation is commonly thought of as an early indicator for overall economic health.

Fixed income markets were positive last week as bond traders and investors reacted to the news out of Japan and the results of the latest US Fed FOMC meeting:

Fixed Income Change
Long (20+ years) 1.99%
Middle (7-10 years) 0.85%
Short (less than 1 year) 0.03%
TIPS 0.71%

Currency trading volume was average last week. The largest movement last week was seen in Japan after the announcement of more stimulus, discussed above in the international news section. Overall, the US dollar decreased by 2.14 percent against a basket of foreign currencies. The strongest of the major global currencies last week was the Japanese Yen, as it advanced by 4.04 percent against the value of the US dollar (opposite the movement the BOJ would like to see). The worst performance of the global currencies was the Chinese Yuan as it declined by 0.09 percent against the value of the US dollar.

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

Metals Change Commodities Change
Gold 2.08% Oil -6.33%
Silver 3.64% Livestock -1.43%
Copper -0.70% Grains -0.72%
Agriculture -0.68%

The overall Goldman Sachs Commodity Index declined by 3.26 percent last week, as Oil decreased 6.33 percent. The decrease in oil prices last week accelerated the losses in oil, which have occurred over the past few weeks. At these levels, oil is very close (within 1 percent) of officially moving back into a bear market as the correction we have seen over the past few weeks has now reached 20 percent. The major precious metals were positive last week with Gold gaining 2.08 percent and Silver moving higher by 3.64 percent as the metals continue to trade in a range-bound manner. The more industrially used Copper decreased by 0.70 percent, breaking a two week trend of rising Copper prices. Soft commodities were weak last week with Agriculture overall falling 0.68 percent, while Livestock declined 1.43 percent and Grains declined 0.72 percent over the course of the week.

Top 2 Indexes Country Change Bottom 2 Indexes Country Change
CASE 30 Index Egypt 8.0% All-Shares Norway -2.5%
BIST 100 Turkey 5.1% Straits Times Singapore -2.6%

Last week saw 50 percent of the major global markets turn in positive performance for the week. The best performing index last week was found in Egypt and was the CASE 30 index, which turned in a gain of 8 percent for the week. The worst performing index for the week was found in Singapore and was the Straits Times Index, which turned in a loss of 2.6 percent. Much of the decline in Singapore was due to the strengthening Singapore dollar against the US dollar, which has a negative impact on exports for the country.

The VIX continued to push lower last week, but managed to stay above the lowest point of the year that was put in place two weeks ago.  With a decline of only 1.25 percent, the VIX last week saw the least volatility that we have seen on a weekly basis since the middle of May. The current reading of 11.87 implies that a move of 3.42 percent is likely to occur over the next 30 days. With the poor GDP number seen on Friday, the market now seems to be even more complacent as it views the odds of the Fed being able to increase rates even one time during the remainder of 2016 as being less than 50 percent. With the Fed staying put on rates and several other key central banks likely increasing stimulus over the coming months, the markets will likely continue to be flush with cash for the foreseeable future, which is what the VIX is signaling.

For the trading week ending on 7/29/2016, returns in the hybrid hypothetical models* (net of a 1% annual management fee) were as follows:

  Last Week 2016 YTD Since 6/30/2015
Aggressive Model -0.62 % 4.71 % 9.21 %
Aggressive Benchmark 0.75 % 3.84 % -1.44 %
Growth Model -0.48 % 4.69 % 8.19 %
Growth Benchmark 0.58 % 3.12 % -0.89 %
Moderate Model -0.36 % 4.60 % 7.46 %
Moderate Benchmark 0.41 % 2.34 % -0.44 %
Income Model -0.41 % 4.98 % 7.73 %
Income Benchmark 0.22 % 1.30 % -0.01 %
S&P 500 -0.07 % 6.34 % 5.36 %

*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 one change last week to the hybrid investment models and that was to move out of the recently acquired position in precious metals. The position was purchased as the metals had been a relatively low volatility area of the markets that offered low correlation to the underlying stock in the models. However, once the position was purchased, the volatility in metals increased significantly and the single position was driving far too much of the risk and volatility in the models. Over the longer term precious metals could pan out to be a good investment if more money is thrown at the global economy to get it moving faster, but between now and then it appears the sector will have more volatility than it has over the past few months. The proceeds from the sale are currently in cash and will be deployed as opportunities present themselves.

 

Economic Release Calendar:

 

Last week was a pretty busy week for economic news releases with almost half of the releases showing negative results when compared to expectations:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Neutral 7/26/2016 Case-Shiller 20-city Index May 2016 5.20% 5.40%
Slightly Positive 7/26/2016 Consumer Confidence July 2016 97.3 96.0
Negative 7/27/2016 Durable Orders June 2016 -4.0% -1.0%
Negative 7/27/2016 Durable Orders, ex-transportation June 2016 -0.5% 0.2%
Neutral 7/27/2016 FOMC Rate Decision July 2016 0.375% 0.375%
Negative 7/29/2016 GDP-Adv. Q2 2016 1.2% 2.6%
Neutral 7/29/2016 Chicago PMI July 2016 55.8 54
Neutral 7/29/2016 University of Michigan Consumer Sentiment Index July 2016 90.0 90.4

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 for the month of May and the Consumer Confidence index for the month of July. The home price index showed prices increased at a 5.2 percent rate on a year-over-year basis, which is steady, but not as strong as we have seen in the past few years in the housing market. Consumer confidence increased according to the government’s release during the month of July, but stayed below the 100 level, which is a level that shows a lot of exuberance about the US economy. On Wednesday the durable goods orders figures for the month of June were released and missed expectations. Overall, durable goods orders were expected to show a contraction of 1 percent, but instead posted a contraction of 4 percent. When transportation is removed from the equation, durable orders declined by 0.5 percent during June, compared to expectations that they would have increased 0.2 percent. Both of these figures show weakness in the overall US economy as big ticket items are typically purchased when companies and individuals are very confident about the future direction of the economy. Later during the day on Wednesday the US Fed released its latest rate decision at the conclusion of the July meeting, at which the rate was left unchanged, discussed above in the national news section. On Friday, the first estimate of GDP for the second quarter of 2016 was released and came in much lower than was anticipated, posting a reading of 1.2 percent compared to expectations of 2.6 percent. The release also held a downward revision for the first quarter GDP estimate from 1.1 percent down to 0.8 percent. The low readings in both the first and second quarter will make hitting the full year 2016 GDP growth rate goal of 2.5 percent very difficult. One thing to remember in this release is that there can be at least three revisions to this figure in the future. Recently the revisions have primarily been the lowering of the initial estimates, but it could be revised higher. One of the biggest reasons for the lower GDP print on Friday was the decline in business inventories, which is common during the general course of business and not indicative of a problem coming for the US economy. Last week wrapped up on Friday with the release of the University of Michigan’s Consumer Sentiment Index, which posted a slightly lower than expected reading of 90.0 as consumers seem to be a bit more cautious with the US financial markets hitting all time high levels.

 

This week is a busier than usual summer trading week, with the primary focus of the week being jobs in the US. The releases that could impact the markets are highlighted in green below:

 

Date Release Release Range Market Expectation
8/1/2016 Construction Spending June 2016 0.7%
8/1/2016 ISM Index July 2016 53.1
8/2/2016 Personal Income June 2016 0.3%
8/2/2016 Personal Spending June 2016 0.3%
8/3/2016 ADP Employment Change July 2016 165K
8/3/2016 ISM Services July 2016 55.8
8/5/2016 Nonfarm Payrolls July 2016 185K
8/5/2016 Nonfarm Private Payrolls July 2016 171K
8/5/2016 Unemployment Rate July 2016 4.8%

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

 

This week the economic news releases start on Monday with the release of construction spending for the month of June and the ISM index for the month of July. The ISM release will likely overshadow the release of construction spending as it is expected to post a reading of 53.1, down slightly from the reading in June. On Tuesday, personal income and spending are set to be released with both numbers expected to be very low, posting just 0.3 percent growth. We need to see these two numbers both pick up significantly if we are to really see the chance of interest rates increase here in the US. On Wednesday, we see a preview of the jobs reports later in the week as the ADP employment change report is released with expectations of 165,000 jobs having been created during the month. Also released on Wednesday is the services side of the ISM, which is expected to post a reading of 55.8, a slight decrease of about the same magnitude as the decline in the overall ISM released earlier during the week. On Friday some of the most important employment related figures in a long time are set to be released by the government as they will potentially dictate when the Fed will be able to start increasing rates. Overall unemployment is expected to have ticked down by a tenth to 4.8 percent from 4.9 percent, while payroll numbers are expected to come back down to earth after the stellar and unexpected reading in June. The Fed needs both of the payroll figures to come in at or above expectations to keep a rate hike on the table for 2016. Other items to watch in the release include average hourly wage and labor force participation as well as the various different unemployment rates that are released. Overall, the markets will likely not pay much attention to the economic news releases until Friday this week.

 

Interesting Fact Returns during the Summer Olympics

According to Andrew Birstingl from Factset Research, the average return for the Dow Jones Industrial Average during the Summer Olympic Games is 1.8 percent. The data set includes all 21 occurrences of the summer Olympics that lasted two weeks in length. In total, 14 of the 21 (67%) occurrences turned in positive results.

Rio 2016

Source: http://www.yahoo.com

For a pdf version of the below commentary please click here Weekly Letter 7-25-2016

Commentary quick take:

 

  • Market statistics:
    • Global markets pushed higher on low volume
    • Earnings season helped move markets
    • VIX is now at the lowest point we have seen in more than two years

 

  • Earnings season for the second quarter is fully under way
    • So far, better than expected
    • Odd individual stock movements due to earnings
    • Energy is in the spotlight

 

  • US politics
    • Republican National Convention took place last week
    • Democratic National Convention is being held this week
    • Markets seem to be taking the 2016 election in stride

 

  • Europe
    • IMF cut global growth again due to Brexit
    • ECB held rates at zero
    • ECB seems to be preparing for further action at an upcoming meeting

 

  • Technical market view:
    • All three indexes extended their upward run
    • NASDAQ is getting very close to breaking out of the trading range

 

  • Hybrid investments strategy update:
    • No changes made to any of the models last week
    • Earnings season continues to drive stock performance

 

  • This week for the markets:
    • Central bank meetings and decisions
    • Politics could start to impact the markets

 

  • Interesting Fact: It is getting hot out there

 


Major theme of the markets last week: Summer trading

summer cartoon 7-25-16

Last week was the first trading week of the year that really felt and looked like a summer trading week. Summer trading is typically punctuated by a general lack of direction in the markets accompanied by low trading volume. The general lack of new information affecting the US economy accompanied by low expectations for a rate hike by the Fed at this week’s July meeting left many investors in a sort of limbo, unsure which way the US financial markets will move in the near term. Cash continues to play an integral role for many money managers and individual investors alike, as the market has a “feel” of being too high, yet there are very few other investments to turn to in the ultra-low interest rates environment we are currently moving through. One thing that was very obvious last week in the markets is that fear is not currently high in the minds of many investors as the VIX touched a near two-year low last week.

 


US news impacting the financial markets: The focus of the US news last week was on two things: the Republican National Convention (RNC) held in Cleveland, Ohio and second quarter 2016 earnings. The RNC took place during the majority of the week last week and was filled with speeches from people with the last name of Trump as well as a number of other politicians and well known individuals. Trump received the official nomination without too much of a fight, as expected, and the global financial markets seemed to pay little attention to the whole event. The lack of interest in the RNC was largely due to the market already knowing who was going to be nominated and that it will be a very close race in the fall between Clinton and Trump. With the Democratic National Convention (DNC) being held this week in Philadelphia we could see some market reaction, but it is still very early in the election cycle to really see any major market movements solely due to politics. While much of the national media was watching politics, the second quarter earnings season got fully under way last week with many well-known companies reporting their second quarter 2016 earnings 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:

 

Advanced Micro Devices 36% Goldman Sachs 24% RLI -3%
American Airlines 7% Halliburton 26% Schlumberger 5%
American Express 9% Honeywell International 1% Sherwin-Williams -3%
AT&T 0% Intel 11% Skyworks Solutions 3%
Autoliv 1% IBM 2% Southwest Airlines -2%
Bank of America 6% J B Hunt Transport -4% Stanley Black & Decker 7%
Bank of New York 1% Johnson & Johnson 4% Starbucks 0%
Charles Schwab 0% Johnson Controls 4% Stryker 2%
Chipotle Mexican Grill -11% Lockheed Martin 14% Swift Transportation 10%
D.R. Horton 0% Manpower Group 5% Tupperware Brands 5%
DISH Network 19% Microsoft 19% Union Pacific 0%
Domino’s Pizza 5% Morgan Stanley 25% United Continental 2%
Dunkin’ Brands 2% Netflix 350% Unitedhealth 4%
eBay 0% Newmont Mining 57% VF 6%
General Electric 11% Philip Morris International -5% Visa 3%
General Motors 22% PulteGroup 12% Whirlpool 4%
Genuine Parts -2% Rambus 20% Yahoo! -350%

 

There were very few surprises last week in the earnings announcements, but there were a few notable stock movements. Netflix turned in a strong quarter, besting expectations of $0.02 per share by announcing $0.09 per share. This seems like it would be positive for the stock, yet Netflix saw its stock decline by more than 13 percent the day following the announcement as growth in new subscribers was anticipated to slow in the future.  Doing almost the reverse was Chipotle (CMG), which is still struggling with public perceptions of food poisoning. CMG posted a decline in new income of 82 percent for the second quarter as same store sales declined by 24 percent. However, the day following the announcement, CMG stock was up more than 5 percent on the hopes that the company will be able to turn things around. Earnings season can be a very wild time for even the biggest of stocks as investors and analysts alike adjust their positions and thoughts to the new information released.

 

According to Factset Research, we have seen 127 (25 percent) of the S&P 500 companies release their results for the second quarter of 2016. Of the 127 that have released, 68 percent have beaten earnings estimates, while 15 percent have met expectations and 17 percent have fallen short of expectations. When looking at revenue of the companies that have reported, 57 percent of the companies have beaten estimates, while 43 percent have fallen short. So far, the second quarter of 2016 earnings season looks to be doing pretty well, albeit expectations were so low that it is not entirely surprising to see so many companies beating expectations. Some of the major themes that seem to be coming up in many of the quarterly results include the potential impact of the Brexit, currency movements and the price of oil. This coming week is a very busy week and could set the tone for the rest of the companies that have yet to report earnings as there are a number of very large and influential companies that will be reporting.

 

This week is one of the two busiest weeks of the quarter for earnings being reported with more than 1,700 companies reporting. The table below shows the companies that have the greatest potential to move the markets highlighted in green:

 

Aflac Colgate-Palmolive Panera Bread
Alphabet ConocoPhillips PG&E
Altria Dow Chemical Phillips 66
Amazon.com Dr Pepper Snapple Public Storage
Amgen Eastman Chemical Raytheon
Anthem Exxon Mobil Regal Entertainment
Apple Facebook Simon Property
Aptargroup Ford Motor Six Flags Entertainment
Arthur J Gallagher General Dynamics Sprint
ADP Harley-Davidson Texas Instruments
Baker Hughes Hershey Twitter
Boeing J & J Snack Foods Under Armour
Bristol-Myers Squibb Kimberly-Clark United Technologies
Buffalo Wild Wings Marriott International Valero Energy
Cabela’s MasterCard Verizon
Caterpillar McDonald’s Waste Management
Chevron New York Times Whole Foods Market
Coca-Cola Northrop Grumman Xerox

 

The focus this week will be on large technology companies as Apple, Amazon, Google, Facebook and Twitter all report earnings for the second quarter of 2016. Apple is almost always a market mover as even if earnings come in exactly at market expectations the markets will react to what management has to say. Expectations are low for Apple this quarter, following last quarter’s release, which posted a decline in iPhone sales for the first time ever. With such a low bar having been set it would not be surprising to see Apple have a comeback quarter, easily beating market expectations. Energy is a second focus of the week this week as many of the very large integrated oil companies release their results for a quarter that saw oil prices rally through much of the quarter. Exxon, Chevron and ConocoPhillips have the most potential to shift the overall markets on the days they announce, but the industry will generally be looked at as a whole when the markets are evaluating how much of an impact energy will play on the markets going forward. Consumer products is a final major theme this week in the companies reporting earnings as Coca-Cola, Kimberly-Clark and Colgate-Palmolive all could set the tone for an entire sector with their earnings results.

 

Global news impacting the markets: The main stories last week in the global financial markets were a post-Brexit IMF report on the global markets and a meeting held by the ECB during the week. On Tuesday last week the IMF released a special world Economic Outlook Update, which dealt with the potential fallout from the Brexit and the UK leaving the EU. We are still very far from any concrete action being taken on the Brexit as the new PM in the UK, Theresa May, has said that she will wait until at least the start of the new year before invoking article 50, which starts the 2 year clock for the UK to negotiate leaving the EU. In the report, the IMF cut the global growth forecast from 3.5 percent down to 3.4 percent, saying “The Brexit vote implies a substantial increase in economic, political, and institutional uncertainty, which is projected to have negative macroeconomic consequences, especially in advanced European economies.” While the ECB updated its projection for a post-Brexit world, the ECB also made waves last week when it held one of its monthly interest rate setting meetings.

 

The ECB was largely expected to not move rates at the July meeting, opting instead to wait on the fallout from the Brexit prior to making any major adjustments to its current policies of quantitative easing. The ECB left its primary benchmark rate at zero and kept the deposit rate at -0.4 percent. It is widely expected that the ECB will increase its bond buying program at the meeting in either August or September, but there is a slight problem with the current buying program. Negative Interest Rate Policy (NIRP) is a phenomenon where governments are able to issue debts that carry a negative yield, meaning an investor will get back less than it put into the bonds if held to maturity. Currently there are a large number of European bonds that are trading at a negative interest rate and the ECB is only allowed to purchase bonds that have a yield of -0.4 percent or higher. As rates continue to push lower and lower into negative territory it is becoming very difficult for the ECB to find enough bonds that qualify for purchase. One simple fix, and the most likely course of action for the ECB, is to just do away with the rule of buying bonds that have a yield that is better than -0.4 percent. However, doing away with this rule would leave the bank open to taking greater long term losses on the fixed income investments than it has been willing to accept. This is just one of the many potential issues that NIRP could have. How it will all play out over time is very uncertain, as we have never before seen such a large amount of negative interest bearing paper in the global financial system.

 

Technical market review:

 

The charts below show each of the three major indexes, plus the VIX, drawn with green lines. The blue lines represent the closest level of support for each of the indexes, established by points that the markets have touched in the past prior to bouncing higher. The red line on the NASDAQ depicts the closest resistance levels, as represented by points that have been tested on each index several times in the last 6 months. There are no red lines on the Dow of the S&P 500 charts as both indexes jumped higher, making new all times highs along the way. For the VIX, the red line remains the rolling 52-week average level of the VIX.

4 charts combined 7-25-16

As can be seen in the charts above, the S&P 500 (upper left pane above) is the strongest of the three major indexes as it moved higher last week, but did so in a much more choppy fashion than the previous few weeks’ movements. The Dow (upper right pane above) is currently in second place as it too continued to push higher last week. The NASDAQ (lower left pane above) made up some significant ground last week as the index inched closer to making new all-time highs, joining the other two indexes in breaking out above its most recently trading range. While some of the equity indexes were making new highs, the VIX was pushing lower last week, putting in the lowest level that we have seen since August 26th of 2014.

 

Market Statistics:

 

Last week was a lackluster week for the financial markets as summer trading (lack of general market volume) seemed to be fully under way:

 

Index Change Volume
NASDAQ 1.40% Below Average
S&P 500 0.61% Below Average
Dow 0.29% Below Average

 

Volume was about 80 percent of an average week last week, which is pretty typical for summer trading here in the US. The movement that did happen last week was largely based on earnings results, with companies either moving higher or lower based on whether they beat or fell short of expectations. For the next month or so it is likely that we continue to see slow volume that starts to ramp back up in September and October as the seasonal shift away from trading fades into the lead up to holiday shopping.

 

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

 

Top 5 Sectors Change Bottom 5 Sectors Change
Biotechnology 3.07% Telecommunications -0.87%
Healthcare Providers 2.55% Energy -1.41%
Semiconductors 2.51% Natural Resources -1.65%
Global Real Estate 2.33% Oil & Gas Exploration -2.06%
Technology 2.11% Commodities -3.41%

Technology saw the largest movements last week, led higher by Biotechnology and Semiconductors thanks to earnings results and a few key FDA decisions on drug approvals. Healthcare Providers took the second spot last week in what turned into a very interesting week for the sector as several of the big healthcare companies announced that they are pulling out of Obamacare plans for 2017. On the flip side, commodities had a difficult week last week as oil prices declined, which put pressure on the whole sector with everything from energy to natural resource companies feeling the pain of the falling oil prices.

Fixed income markets were mixed last week as bond traders and investors alike adjusted their positions for the upcoming July FOMC meeting, which takes place this week:

Fixed Income Change
Long (20+ years) 0.30%
Middle (7-10 years) 0.18%
Short (less than 1 year) -0.01%
TIPS -0.28%

Currency trading volume was average for a summer trading week last week. The largest movements were seen in currencies and in heavily natural resource dependent countries. Overall, the US dollar increased by 1.0 percent against a basket of foreign currencies. The strongest of the major global currencies last week was the Chinese Yuan, as it advanced by 0.57 percent against the value of the US dollar. The worst performance of the global currencies was the Australian dollar as it declined by 1.72 percent against the value of the US dollar. This was largely due to the decline in natural resource prices seen around the world last week.

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

Metals Change Commodities Change
Gold -0.39% Oil -5.19%
Silver -2.15% Livestock -2.69%
Copper 0.12% Grains -4.49%
Agriculture -2.86%

The overall Goldman Sachs Commodity Index declined by 3.41 percent last week, as Oil decreased 5.19 percent. The decrease in oil prices seemed to have more to do with the continued over supply of global oil when compared to global demand than any other major headline. One aspect to the current oil market that has some market participates a little concerned is that the pattern that has been emerging in oil prices since the beginning of June is eerily similar to the pattern that occurred in 2014 just before prices really started to move significantly lower. Some of the pattern is seasonal and due to the summer driving season, but still the similarities are hard to miss. The major precious metals were negative last week with Gold falling 0.39 percent, while Silver moved lower by 2.15 percent as the metals bounced around in a trading range last week. The more industrially used Copper increased by 0.12 percent, making it two weeks in a row of increases for Copper, while the precious metals have declined over the same time period. Soft commodities were weak last week with Agriculture overall falling 2.86 percent, while Livestock declined 2.69 percent and Grains declined 4.49 percent over the course of the week. Hot dry weather that has been nearly constant over the past 2 weeks in much of the Mid-West could start to have a noticeable impact on the US harvest if it continues much longer.

Top 2 Indexes Country Change Bottom 2 Indexes Country Change
PX 50 Czech Republic 3.2% RTS Index Russia -2.9%
BUX Index Hungary 2.9% BIST 100 Turkey -13.4%

Last week saw 81 percent of the major global markets turn in positive performance for the week. The best performing index last week was found in the Czech Republic, the PX 50 index, which turned in a gain of 3.2 percent for the week. The worst performing index for the week was found in Turkey, the BIST 100 Index, which turned in a loss of 13.4 percent. The losses in Turkey were due to the government continuing to purge out all of the “collaborators” of the failed coup that took place two weeks ago.

As mentioned above, the VIX continued to push lower last week, breaking down through the lowest point that we have seen during 2016 and hitting a low that has not been seen since August 26th of 2014.  The current reading of 12.02 implies that a move of 3.47 percent is likely to occur over the next 30 days. Despite being at these low levels, the VIX looks like it could keep pushing lower as the “fear” just does not seem to currently be in the markets. One thing to remember about the VIX is that it can change in a hurry, easily going from very low levels to very high levels in a short period of time.

For the trading week ending on 7/22/2016, returns in the hybrid hypothetical models* (net of a 1% annual management fee) were as follows:

  Last Week 2016 YTD Since 6/30/2015
Aggressive Model 0.20 % 5.36 % 9.89 %
Aggressive Benchmark 0.32 % 3.07 % -2.17 %
Growth Model 0.14 % 5.20 % 8.72 %
Growth Benchmark 0.25 % 2.52 % -1.46 %
Moderate Model 0.09 % 4.98 % 7.85 %
Moderate Benchmark 0.18 % 1.91 % -0.85 %
Income Model 0.04 % 5.42 % 8.19 %
Income Benchmark 0.09 % 1.08 % -0.23 %
S&P 500 0.61 % 6.41 % 5.42 %

*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 any of the hybrid models over the course of the previous week. Movement was primarily driven by the precious metals holding. Overall, the models are still defensively positioned in dividend paying equities. The current areas of the markets that are of most interest for potential future investment include Mid-Caps, Technology and Healthcare. VF Corp released its latest quarterly results and saw a slight slowdown in spending, which sent the stock lower the following day. This week is a big week for earnings announcements from individual stock investments in the models as we have 9 companies releasing earnings this week. We could see an uptick in volatility due to earnings, but in general the stocks as a whole should see muted movements when compared to the markets.

 

Economic Release Calendar:

 

Last week was a slow summer week for the economic calendar in terms of the number of releases, with only one release that significantly missed market expectations:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Neutral 7/19/2016 Building Permits June 2016 1153K 1150K
Neutral 7/19/2016 Housing Starts June 2016 1189K 1165K
Negative 7/21/2016 Philadelphia Fed July 2016 -2.9 5
Neutral 7/21/2016 Existing Home Sales June 2016 5.57M 5.50M

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

 

Economic news releases started on Tuesday last week with the release of building permits and housing starts, both of which came in very close to market expectations and had no noticeable impact on the overall markets or on the housing related stocks. On Thursday the Philadelphia Fed released their latest Philly Fed index, which showed a -2.9 reading while the market had been expecting a reading of 5. This is potentially an issue as it indicates that manufacturing and business conditions actually deteriorated during the month of July in the greater Philadelphia region. This follows a similar trend that we saw last week on the Empire Manufacturing index, which showed a contraction for the same time period. Manufacturing has been weak now for the past 4 months and could present a very interesting problem for the Fed. Wrapping up the week last week on Thursday was the release of the existing home sales figures for the month of June, which like the other two housing related releases earlier during the week held nothing out of the ordinary.

 

This week is a typical summer trading week, but there are an unusually large percentage of the releases that could impact the markets (highlighted in green below):

 

Date Release Release Range Market Expectation
7/26/2016 Case-Shiller 20-city Index May 2016 5.40%
7/26/2016 Consumer Confidence July 2016 96.00
7/27/2016 Durable Orders June 2016 -1.00%
7/27/2016 Durable Orders, ex-transportation June 2016 0.20%
7/27/2016 FOMC Rate Decision July 2016 0.38%
7/29/2016 GDP-Adv. Q2 2016 2.60%
7/29/2016 Chicago PMI July 2016 54
7/29/2016 University of Michigan Consumer Sentiment Index July 2016 90.4

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

 

This week the economic news releases start on Tuesday with the release of the Case-Shiller 20 City Home Price Index for the month of May and Consumer Confidence for the month of July. Consumer Confidence will largely overshadow the Home Price Index as it has a more immediate potential impact on the markets. After the poor University of Michigan Consumer Sentiment reading two weeks ago the market will be watching the government’s consumer confidence measure extra close this week. On Wednesday the durable goods orders for the month of June will be released as we could see some very large movements when compared to May’s reading, thanks to a very large air show held in the UK during June at which many large plane orders were booked. The markets will have very little time to digest the durable goods orders on Wednesday, however, as the FOMC meeting for the month of July concludes on Wednesday and will likely take the spot light. The odds of a rate hike at this meeting are a paltry 2 percent, so the market will be much more interested in how Chair Yellen frames the potential rate increase at the next couple of meetings than what occurs at this meeting. On Friday, the government releases its advanced estimate for GDP during the second quarter of 2016 here in the US. Expectations are for a reading of 2.6 percent, up from the final reading of first quarter 2016, which was only 1.1 percent. The market will likely react to this release even if it comes in at market expectations as GDP here in the US is vitally important to many models that investors use when determining what stocks to own and when to make adjustments to their investments. Also on Friday, the Chicago area PMI for the month of July will be released. We will have to wait and see if this index goes the same direction as the Empire and the Philly index for the month of July. Wrapping up the week this week is the release of the University of Michigan’s Consumer Sentiment index for the month of July (final estimate), which is expected to show a slight pull back from the mid-month estimate. As mentioned above, all eyes this week will be on the Fed and its statement about rates as this could have far reaching impacts on the global financial markets.

 

Interesting Fact June was the 14th consecutive month for record heat

temp 7-25-16

According to the United Nations and NOAA, June was the 14th consecutive month of record high temperatures around the world. The first 6 months of 2016 was 1.3 Celsius warmer than any other year going all of the way back to the pre-industrial era of the 19th century.

 

Source: http://www.theguardian.com

For a PDF version of the below commentary please click here Weekly Letter 7-18-2016

Commentary quick take:

 

  • Market statistics
    • Markets increased on developments in the UK
    • Volume overall was lacking last week
    • VIX is now at the lowest point we have seen in more than a year

 

  • Earnings season for the second quarter has started
    • Alcoa kicked things off by beating expectations
    • With 7 percent of the S&P 500 reporting earnings, this looks like a pretty weak quarter
    • Financials turned in mixed results in this ultra-low rate environment

 

  • US politics
    • Republican National Convention is this week
    • Democratic National Convention will be held next week
    • Markets seem to be taking the 2016 election in stride

 

  • Japan
    • Nikkei turned in the best week of the year in terms of gains last week
    • Prime Minster Abe won reelection in a landslide
    • BOJ expected to provide bigger stimulus to the economy

 

  • UK
    • BOE held a rate meeting last week, leaving the rate unchanged
    • BOE set up to announce stimulus at the upcoming August meeting
    • New Prime Minister selected

 

  • Technical market view
    • All three indexes extended their upward run
    • Markets will likely remain choppy for the near term

 

  • Hybrid investments strategy update
    • Repositioned models last week
    • Increased exposure to the Russell 2000 and Precious Metals
    • Consumer staples had a rough week

 

  • This week for the markets
    • Earnings season for the second quarter of 2016
    • Politics could start to impact the markets

 

  • Interesting Fact: What is America’s land worth?

 

Major theme of the markets last week: Japan

funny 7-18-16

Japan was a major theme for the global financial markets last week as investors around the world became more hopeful for further stimulus from the government after the landslide election results for Prime Minister Abe. Abenomics (the economic recovery packages that PM Abe has implemented) now look set to grow even further as Japan continues to struggle to find a magic combination of stimulus that will get the economy in Japan moving forward. In the financial markets last week the Nikkei 225 (main Japanese index) increased by more than 9 percent, giving it one of the best weekly performances of any of the major global indexes that we have seen so far during 2016.

 

US news impacting the financial markets: The US markets last week traded largely on external news as the internal news focused on some of the recent shootings around the US. There was, however, some focus on earnings season being now fully underway for the second quarter of 2016 and on the upcoming Presidential election.

 

Second quarter 2016 earnings season officially kicked off last week after the markets closed on Monday with Alcoa releasing its earnings report. Alcoa beat analyst expectations of $0.09 per share when it posted earnings of $0.15 per share for the second quarter of 2016. Revenues also beat expectations, coming in at $5.3 billion versus the expected $5.2 billion. These results beat analyst expectations, but as we will likely see many times more during this earnings season, the results were not very good when compared to a year ago. For the second quarter of 2015, Alcoa posted revenues of $5.9 billion and earnings per share of $0.19. Although technically Alcoa surprised to the upside, the bar had been lowered so much that making less this year than last was actually seen as a win. This type of result is widely expected for second quarter 2016’s earnings reports as overall earnings are still expected to be down for the S&P 500 by 5.6 percent on a year-over-year basis.

 

Below is a table of the well-known companies that released earnings last week with earnings that missed expectations highlighted in red, while earnings that beat expectations by more than 10 percent are highlighted in green:

 

Alcoa 67% Delta Air Lines 4% Progressive -9%
BlackRock 0% Fastenal -6% U.S. Bancorp 2%
Citigroup 15% JPMorgan Chase 8% Wells Fargo -1%
CSX 7% Knoll Pushed Yum! Brands 1%

 

Aside from Alcoa, discussed above, the markets seemed to pay close attention to the earnings results of a few of the major banks that reported earnings last week. Citigroup turned in the best results, beating expectations by 15 percent, but JP Morgan and US Bancorp also turned in strong earnings reports. The laggard of the group was Wells Fargo, which saw earnings miss expectations. Much like all of the other banks, Wells Fargo cast blame on the low interest rate environment in which it currently has to operate. On a year-over-year basis, Wells Fargo saw earnings per share decline by 18 percent, which is in line with the year-over-year decline seen in Alcoa’s reported earnings. Delta Airlines reported a better than expected quarter after the hedging contracts it entered into for fuel over the past two years helped the company combat the rising cost of fuel during the quarter.

 

According to Factset Research, we have seen 35 (7 percent) of the S&P 500 companies release their results for the second quarter of 2016. Of the 35 that have released earnings, 66 percent have met or beaten earnings estimates, while 34 percent have fallen short of expectations. When looking at the revenue of the companies that have reported, 51 percent of the companies have beaten estimates, while 49 percent have fallen short. These figures are a bit lower at this stage than the first quarter of 2016 and could be a sign of trouble coming from the second quarter earnings season. All of the above percentages are somewhat unreliable as we have such a small sampling of companies that have reported earnings so far for the second quarter of 2016. We should have a much clearer picture of how earnings season will go after this week when we have 140 of the S&P 500 component companies report their results. We also start to see the earnings of the energy industry, which will be watched very closely to see if the industry has recovered along with the price of oil.

 

With earnings season picking up this week, the table below is much larger than last week. There are many well-known companies that will be reporting earnings that could have an impact on the overall markets. The table below shows the companies that have the greatest potential to move the markets highlighted in green:

 

Advanced Micro Devices Goldman Sachs RLI
American Airlines Halliburton Schlumberger
American Express Honeywell International Sherwin-Williams
AT&T Intel Skyworks Solutions
Autoliv IBM Southwest Airlines
Bank of America J B Hunt Transport Stanley Black & Decker
Bank of New York Johnson & Johnson Starbucks
Charles Schwab Johnson Controls Stryker
Chipotle Mexican Grill Lockheed Martin Swift Transportation
D.R. Horton ManpowerGroup Tupperware Brands
DISH Network Microsoft Union Pacific
Domino’s Pizza Morgan Stanley United Continental
Dunkin’ Brands Netflix Unitedhealth
eBay Newmont Mining VF
General Electric Philip Morris International Visa
General Motors PulteGroup Whirlpool
Genuine Parts Rambus Yahoo!

 

Two of the bellwether technology companies, Netflix and Microsoft, both release their earnings this week in a sort of kick-off to technology earnings. Investors will be closely watching the number of new subscribers added to Netflix during the quarter as well as the total number of subscribers lost to other platforms as these two numbers typically drive the immediate movements of the stock after an earnings announcement. For Microsoft, it will be all about Windows 10 and how it is being adopted by the general public. Last year Microsoft said it would get to a billion devices running windows 10 by 2018. For Microsoft to hit that lofty goal, we would need to be seeing a much faster adoption rate than many analysts have been predicting. This quarter’s earnings report should hold the number of Windows 10 adoptions and could push the stock either higher or lower, depending on what the number turns out to be. Two other companies that Wall Street will be very closely watching this week are Visa and American Express as both companies represent a very large number of credit card transactions that take place around the world. Both companies typically have a pretty good read on consumer sentiment and spending patterns, which can move the overall markets. American Express will also be closely watched this quarter in particular to see if Costco dropping it as the only card company accepted at its stores will have any material impact on the company. Lastly, this week the first of the major energy companies release their earnings results as both Halliburton and Schlumberger jump first for a sector that is under a lot of scrutiny from Wall Street.

 

In addition to earnings season taking a lot of the national financial media spotlight, the upcoming 2016 Presidential election was also in focus as the Republican National Convention gets under way this evening. There still seems to be a lot of disagreement within the Republican Party about the presumptive nominee being Donald Trump, as illustrated by Ohio Governor John Kasich opting out of making an appearance at the convention in his own backyard. But with the rules committee having already met and keeping in place the rules that were in place prior to Trump securing enough votes to be the nominee, it looks like there should not be any contest at the convention over who the Republican candidate will be. Next week it is the Democrats’ turn to hold their convention as Hillary Clinton will officially be nominated as the Democratic nominee for President. In general, the financial markets have not been reacting to the political process that has been so fascinating to watch. As we draw near to the election and policies and ideas start to become more and more important to voters, we could see the market start to react a little more to the upcoming election outcome.

 

Global news impacting the markets: Japan and the United Kingdom made many headlines last week that markets around the world seemed to react positively toward. Japan saw a huge move in its financial markets last week, adding more than 9 percent to the main Japanese index, the Nikkei 225. Much of this was achieved because of the election held on Sunday in Japan in which Prime Minister Shinzo Abe’s Liberal Democratic Party won in what is being described as a landslide victory. The victory was so resounding that the party actually gained enough seats to control Parliament with a greater than two-thirds majority, the strongest position ever for the party that has been largely in control for the last 61 years in Japan. So why did this election cause the Japanese financial market to jump so high? With these results, there are thoughts that Prime Minster Abe will be able to undertake an ever larger stimulus program for the economy and that he will face little if any meaningful opposition to his plans at any level of government. One aspect of the results that has some neighboring countries uneasy, especially China, is that with such a majority in government, Prime Minster Abe may be able to enact some constitutional revisions, one in particular being modifications to Article 9 in the Japanese constitution, which renounces Japan’s ability to wage war, which could put Japan on the path toward becoming a military super power. It is obvious that China would not want this to occur as Japan being a military super power could potentially cause many headaches for mainland China in the year ahead as it continues to deal with its rapid global expansion. One of the most likely things that we will see quickly in Japan will be a move by the Bank of Japan to try to further stimulate the economy. Former Fed Chair Ben Bernanke was in Japan last week and met with Abe about the economy in Japan. While no actions were immediately taken as a result of the meeting, it is likely that further negative interest rates and more government spending to try to boost exports, even at the expense of the Yen, are likely. While Japan’s political leadership remains largely unchanged, last week a new Prime Minster was put in place in the United Kingdom.

 

Following the Brexit vote and the announcement that Prime Minster David Cameron would be stepping down from his position as soon as October, the political system in the UK went into overdrive to try to come up with likely PM candidates. At the onset of last week, the potential PM candidates had been narrowed down to two. On Monday, one resigned, leaving only Theresa May running for the position. With May clearly going to be the next PM in the UK, Cameron resigned months earlier than expected last week and May became the PM on Wednesday evening, when she met with the Queen and was invited to form a new government. She has already filled several key cabinet positions, as Boris Johnson, one of the two leading Brexit politicians, became the Foreign Secretary and David Davis was named as the person in charge of leading negotiations between the UK and the EU to extract the UK from the EU. Davis has been a longtime Euro skeptic and is likely to be very verbose in his dealings with other EU members. One big question that still looms over the UK is when it will officially invoke Article 50, which formally announces to the EU the country’s wish to leave the union. PM May has said that she will take her time and hold many meetings with people well versed on the subject before making a decision as to the timing. However, the rest of the Europeans seem to be calling on the UK to invoke Article 50 so that the two-year clock gets moving and the process of the UK withdrawing can officially begin. Financial markets both in the UK and elsewhere around the world liked the fact that there will not be another election in the UK to decide on the next PM and that she seems to be moving forward with a level head about the Brexit.

 

Technical market review:

 

The charts below show each of the three major indexes, plus the VIX, drawn with green lines. The red lines on the three major indexes depict the closest resistance levels, as represented by points that have been tested on each index several times in the last 6 months. The blue lines represent the closest level of support for each of the indexes, established by points that the markets have touched in the past prior to bouncing higher. For the VIX, the red line remains the rolling 52-week average level of the VIX.

4 charts combined 7-18-16

With the increase last week, the global markets officially recovered from the losses resulting from the Brexit vote. The US was no exception as both the S&P 500 and the Dow made new all-time highs several times during the week. As can be seen in the charts above, the S&P 500 (upper left pane above) is the strongest of the three major indexes as it has pushed the furthest above its resistance level (red line). The Dow (upper right pane above) is currently in second place as it too is above its most recent resistance level, but slightly less in terms of percentages than the S&P 500. The NASDAQ (lower left pane above) finally made it to and through its resistance level last week, but the index still has a significant way to go before it starts to make new all-time highs like the other two indexes. While some of the equity indexes were making new highs, the VIX was pushing lower, putting in the lowest level we have seen since August 10th of 2015 last week. The VIX really seems to be trading on bets that central banks around the world are about to embark on another major round of quantitative easing, which may or may not be correct. If we do not see some major central bank action in the next few weeks it looks like the VIX will move significantly higher than these levels.

 

Market Statistics:

 

Last week turned out to be a positive week for the US financial markets, thanks to positive developments in countries such as Japan and the United Kingdom:

 

Index Change Volume
Dow 2.04% Below Average
S&P 500 1.49% Below Average
NASDAQ 1.47% Below Average

 

With all three of the major US indexes up last week on very low volume, some pundits are questioning the validity of the movement. While the pundits are correct that the volume for the markets was about 80 percent of average, we are in the middle of summer trading when volume is typically lower than it would otherwise be. However, it would be nice to see volume pick up some on the days that the markets are moving significantly higher as the downside volume was still almost 1.5 times larger than the upside during the recent week’s movements. This means that fewer people are making trades and participating in the markets when they have moved higher, with more investors than average taking a wait and see approach on the sidelines.

 

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

 

Top 5 Sectors Change Bottom 5 Sectors Change
Regional Banks 4.72% Medical Devices 0.29%
Materials 4.57% Consumer Staples 0.16%
Broker Dealers 4.56% Home Construction 0.10%
Financials 4.10% Real Estate -0.08%
Transportation 4.10% Utilities -0.97%

Sector movements last week were not split evenly between risk-on sectors and risk-off sectors, but there was some distinct lack of performance in the risk-off areas of the markets. Financial related sectors had a good week last week, making up three of the top five sectors in terms of performance as interest rates crept up and the prospects of further central bank stimulus around the world ran high. On the flip side, Utilities, Real Estate and Consumer Staples made up three of the bottom five performing sectors last week as investors seemed to be favoring higher risk assets. Home Construction also took a spot in the bottom five performing sectors as the US housing market appears to be moving into a horizontal period of time as prices have leveled off in many regions of the US.

Fixed income markets were negative last week as bond traders and investors alike adjusted to the prospects of more stimulus from Japan and potentially Europe:

Fixed Income Change
Long (20+ years) -3.63%
Middle (7-10 years) -1.65%
Short (less than 1 year) -0.01%
TIPS -0.97%

Currency trading volume was average last week, as there was a little retracement in the two currencies that have moved the most over the past four weeks. Overall, the US dollar increased by 0.12 percent against a basket of foreign currencies. The strongest of the major global currencies last week was the British Pound, as it advanced by 2.15 percent against the value of the US dollar. Much of the movement in the Pound occurred after the announcement that Theresa May would be taking over as PM sooner than the anticipated October hand-off. The worst performance of the global currencies was the Japanese Yen as it declined by 4.82 percent against the value of the US dollar. This was largely a reversal of the gains we had been seeing over the past four weeks as the BOJ is likely to take bigger actions after the election results than was first thought, which would lead to an even weaker Yen.

Commodities were mixed last week, as precious metals declined, while Oil moved higher:

Metals Change Commodities Change
Gold -2.82% Oil 1.48%
Silver -0.73% Livestock -2.07%
Copper 6.07% Grains -0.90%
Agriculture -0.42%

The overall Goldman Sachs Commodity Index advanced by 0.61 percent last week, as Oil increased 1.48 percent. The increase in oil seemed to be nothing more than a little bounce after oil declined by more than 8 percent two weeks ago, with bargain hunters thinking they had found a good entry point on oil. The major precious metals were negative last week with Gold falling 2.82 percent, while Silver moved lower by 0.73 percent as the safe haven aspects of the two metals seemed to be less in demand than it had been over the past few weeks. The more industrially used Copper increased by 6.07 percent, making back the entire decline seen two weeks ago. Soft commodities were weak last week with Agriculture overall falling 0.42 percent, while Livestock declined 2.07 percent and Grains declined 0.90 percent over the course of the week.

Top 2 Indexes Country Change Bottom 2 Indexes Country Change
Nikkei 225 Japan 9.2% OMX Copenhagen Denmark 0.9%
AST Index Austria 7.0% BUX Index Hungary 0.2%

There were no major global indexes that turned in negative performance last week, which is a rare feat. The best performing index last week was found in Japan, the Nikkei 225 Index, which turned in a gain of 9.2 percent for the week. The worst performing index for the week was found in Hungary and was the BUX Index, which turned in a gain of 0.2 percent.

As mentioned above, the VIX continued to push lower last week, breaking down through the lowest point that we have seen during 2016 and hitting a low that has not been seen since August 8th of 2015.  The current reading of 12.67 implies that a move of 3.66 percent is likely to occur over the next 30 days. Some of the movement in the VIX is likely due to the UK clearing up some of the uncertainty hanging over the Brexit vote with the new PM being seated and a new cabinet being formed. The Brexit vote seems to now be a waiting game until the UK decides how best to proceed.

For the trading week ending on 7/15/2016, returns in the hybrid hypothetical models* (net of a 1% annual management fee) were as follows:

  Last Week 2016 YTD Since 6/30/2015
Aggressive Model 0.16 % 5.15 % 10.71 %
Aggressive Benchmark 2.29 % 2.75 % -2.48 %
Growth Model 0.18 % 5.05 % 8.56 %
Growth Benchmark 1.78  % 2.27 % -1.71 %
Moderate Model 0.13 % 4.88 % 7.75 %
Moderate Benchmark 1.28 % 1.73 % -1.02 %
Income Model 0.01 % 5.37 % 8.14 %
Income Benchmark 0.64 % 0.98 % -0.32 %
S&P 500 1.49 % 5.76 % 4.78 %

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

 

There were multiple changes made to the hybrid models over the course of the previous week. The first move was to remove the hedging position that was held across all models early during the week. The volatility over the past two weeks in the stock baskets owned within the models has been minimal with the baskets even holding up well during downward moving trading days. There did not appear to be any reason for maintaining the hedge in the current market environment, so it was removed. In addition to removing the hedging position, new positions were initiated in three different areas of the markets. The first new position is in precious metals, using the Rydex Precious Metals Fund (RYPMX); this position was purchased because as central banks increase stimulus around the world, it is typically a very good thing for the precious metals market and gold and silver both hold their value against falling currencies very well. The second new position was in the Midcap Value space through the use of Rydex Mid Cap value (RYAVX). The mid cap market has been performing well in the past two months of volatility and looks like it will continue to do well in the near term. The final positions purchased last week were in the Russell 2000 space, which is the small cap area of the market. Different funds were used in different models based on risk levels of the models to get exposure to the small caps, but all are focused on capturing a large amount of the movement of the Russell 2000. With the adjustments last week, the models have swung from being defensively positioned to more offensively positioned. All funds that were purchased over the course of the past week are tradable positions, meaning if the markets turn negative again, the positions can be sold quickly and the models moved back toward defensive positions.

 

Economic Release Calendar:

 

Last week was a typical summer week for the economic calendar in terms of the number of releases, and the results were mixed with one significantly beating and one significantly falling short of expectations:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Neutral 7/14/2016 PPI June 2016 0.50% 0.30%
Neutral 7/14/2016 Core PPI June 2016 0.40% 0.10%
Slightly Negative 7/15/2016 Empire Manufacturing July 2016 0.55 5
Positive 7/15/2016 Retail Sales June 2016 0.60% 0.20%
Neutral 7/15/2016 Retail Sales ex-auto June 2016 0.70% 0.40%
Neutral 7/15/2016 CPI June 2016 0.20% 0.30%
Neutral 7/15/2016 Core CPI June 2016 0.20% 0.20%
Negative 7/15/2016 University of Michigan Consumer Sentiment Index July 2016 89.5 93

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

 

Last week the economic news releases started off on Thursday with the release of the Producer Price Index (PPI) for the month of June, which came in very close to market expectations and indicated that there is very little inflation at the producer level in the US. Friday was a busy day in terms of economic news releases with the Empire Manufacturing index kicking things off and missing expectations of a reading of 5, but still managing to print a reading above zero with a reading of 0.55, which technically means there was expansion in manufacturing activity, but that it was so slow it was unnoticeable. This release, however, was overshadowed by the retail sales figures that were released at the same time as the Empire Manufacturing index. Retail sales, both including and excluding auto sales, beat market expectations during the month of June. However, the growth seen in retail sales is still very slow compared to where many economists and the Fed would like to see it. Also released on Friday was the Consumer Price Index (CPI). Much like the PPI released earlier during the week, it showed that while prices increased during the month of June, they increased at a much slower rate than the Fed would have liked to see. Wrapping up the week last week on Friday was the release of the University of Michigan’s Consumer Sentiment index for the month of July (first estimate), which missed expectations to the downside last week as it printed a reading of 89.5, while the market had been expecting a reading of 93, like it was at the end of June. This is a negative sign for the overall US economy because if consumers lose confidence in the US economy and pull back on spending it would be very difficult for the Fed to step in and meaningfully reverse what would likely be a downward trend.

 

This week is a typical summer trading week and there are a relatively small number of economic calendar releases. There is only one release this week that really has a chance of impacting the overall markets (highlighted in green below):

 

Date Release Release Range Market Expectation
7/19/2016 Building Permits June 2016 1150K
7/19/2016 Housing Starts June 2016 1165K
7/21/2016 Philadelphia Fed July 2016 5
7/21/2016 Existing Home Sales June 2016 5.50M

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

 

This week the economic news releases start on Tuesday with the release of two housing related figures, those being building permits and housing starts for the month of June. As is typical, the markets will likely pay more attention to housing starts than building permits as a gauge for the overall US housing markets. With both expected to be over a million units, however, it would take a drastic difference between expectations and print for the markets to take much notice. On Friday the one release that could materially impact the markets is set to be released, that being the Philadelphia Fed Index, which is expected to show a reading of 5, much like the Empire Manufacturing index from last week. The key with this release will be that it stays positive. It can print a number below 5, but it needs to stay positive. If it prints a negative number it could spook the markets that the recovery in manufacturing that we have seen over the past two months was nothing more than a blip on the radar.  Wrapping up the economic news releases this week is the release of existing home sales for the month of June, which is expected to show 5.5 million units, which is middle of the road in terms of sales for the height of the summer selling season.

 

Interesting Fact What is America’s land worth?

 map image

According to the latest Federal Reserve’s Flow of Funds report, the value of all the US land is $14.488 trillion.

 

Source: www.slate.com

 

For a PDF of the below commentary please click here Weekly Letter 7-11-2016

Commentary quick take:

 

  • Market statistics:
    • Markets saw choppy trading during the shortened trading week last week
    • Markets pushed higher to end the week, thanks to the jobs report
    • VIX fell by more than 10 percent, leaving it near 2016 lows

 

  • Jobs recovery seen in the US labor market
    • Surprisingly high payroll figures last week
    • Surprisingly weak revision to the May payroll figures
    • Will it be enough to push the Fed to act?

 

  • US Fed seems stuck
    • Odds of a rate hike increased a little last week
    • Odds of a rate cut decreased last week
    • Looks difficult for the Fed to manage a single rate hike in 2016

 

  • Earnings season for the second quarter has arrived
    • Alcoa kicks things off on Monday
    • Expectations are very low for the quarter
    • Overall earnings expected to decline by 5.6 percent for the S&P 500

 

  • Europe could slow down further
    • IMF report cites Brexit for slowdown risk in 2017
    • ECB still failing to see inflation

 

  • Technical market view:
    • All three indexes broke below their trading ranges
    • All three indexes bounced back into their trading ranges at the end of the week
    • Markets will likely remain choppy for the near term

 

  • Hybrid investments strategy update:
    • Remains defensively positioned
    • With uncertainty in earnings season, investment changes will be opportunistically driven in the near term
    • Defensive positioning in consumer driven product companies continues to do well

 

  • This week for the markets:
    • Earnings season for the second quarter of 2016
    • Political uncertainty
      • In the US with the conventions at the end of the week
      • In the UK with the next Prime Minister likely being chosen this week

 

  • Interesting Fact: What’s in a rating?

 


Major theme of the markets last week: US Jobs reports dominated the financial media last week.

jobs cartoon

The primary focus of the global financial markets last week was the US labor market figures, which were released on Friday and showed a significant rebound after the dismal May figures. While the payroll numbers looked strong at first glance, other developments in more behind-the-scenes figures still paint a less than stellar picture of what is going on in the US labor market. The markets, however, seemed to run with the headline figures and pushed the indexes ever closer to all-time high closing levels.

 

US news impacting the financial markets:

 

As mentioned above, the US financial media was obsessed with the labor department’s figures about the US labor market during the month of June. You may remember that the May figures produced just prior to the June FOMC rate meeting showed a huge drop in the payroll figures, with private nonfarm payrolls declining from an April level of 130,000 (under the expected 170,000) all of the way down to a revised -6,000 jobs during the month of May. Public payroll figures also experienced a similar decline with the figure moving from 123,000 in April down to only 11,000 during the month of May. With such a nose dive seen on both public and private payroll figures in May there was a lot riding on the June figures and high hopes that the labor market would show a drastic recovery. On Friday, the Bureau of Labor Statistics did not fail to deliver; it posted that public nonfarm payrolls increased by 287,000 jobs during the month of June and private payrolls increased by 265,000 jobs during the month as well. With such a huge swing in the numbers, going from the worst reading since 2010 to the best reading of the past 9 months, many investors and economists questioned the reasons behind the extreme movements. One of the reasons floated and covered by the media was the thought that college graduation had something to do with the dislocation in the jobs figures, but that does not add up as most colleges finish up with graduation in June. It seems the high June number could indicate that many new jobs were created for the June college grads, but it fails to explain the steep decline in May. One other theory is that the Fed needed poor jobs figures to help justify holding off on raising rates, so the figures released for May were poor enough to allow the Fed to hold off on raising rates at the June meeting. This seems fairly plausible since the jobs report was the single most cited reason for the Fed not increasing rates. Whatever the reason for the wide variation in the payroll figures, the average of the two months comes out to just below 150,000 jobs, which is slow job growth but certainly not anything investors should panic about. One interesting aspect to the releases on Friday was that the overall unemployment rate in the US increased from 4.7 to 4.9 percent, thanks in large part to an increased number of people who have started to look for work, but currently cannot find any. This could also be attributed to unemployed recent college graduates.

 

With the jobs market having “recovered” from the dip in May, many economists and financial pundits are once again starting to debate whether the Fed will raise the Fed Funds rate and if so, when.  While the latest Fed watch figures have shifted a little in favor of a rate hike at some point in the future, the odds are still very low that the next hike will occur during 2016. As you can see in the table to the right, the odds of a rate cut have now all but disappeared, looking all of the way out to the February 2017 meeting. The odds of a rate hike, however, have been steadily increasing after the July meeting (July odds for a hike still hover right at zero) and increase all of the way to 32 percent at the December meeting. The Fed will be watching developments in the labor market and price inflation to determine when it will be the correct time to increase the Fed funds rate. Other aspects the Fed will likely be keeping close tabs on, even if it doesn’t explicitly say so, are developments with the Brexit, the value of the Yen and the overall growth of the global economy. All of this will likely be weighted in determining the correct timing for the next (second) rate hike.

Fed funds 7-11-16

Second quarter 2016 earnings season officially kicks off today after the market closes with Alcoa releasing its earnings report. With Alcoa being a very large multinational aluminum company, it has been dubbed the company that officially kicks off earnings every quarter. One thought that is common on Wall Street is that if Alcoa beats earnings estimates the quarter’s results for the overall markets will likely be better than expected and vice versa if it falls short of expectations. Over the course of the second quarter we saw Aluminum prices recover about 9 percent after having fallen for the majority of the previous 18 months. With some price recovery in Aluminum Alcoa should post strong quarterly results.

cartoon 7-11-15

This week is the start of earnings reporting season and with it there are several well-known companies that report earnings that could have an impact on the overall markets. The table below shows the companies that have the greatest potential to move the markets highlighted in green:

 

Alcoa Delta Air Lines Progressive
BlackRock Fastenal U.S. Bancorp
Citigroup JPMorgan Chase Wells Fargo
CSX Knoll Yum! Brands

 

As mentioned above, Alcoa will be very closely watched for the overall direction of earnings season, but a few of the large financial institutions may have more of a noticeable impact on the markets this week. With JP Morgan, US Bancorp, Wells Fargo and Citigroup all releasing earnings during the same week, and in most cases on the same day, the markets could get very uneasy if the financial institutions talk about the Brexit vote in a long-term, negative light.

 

Expectations for earnings this quarter are very low. It is expected (according to Factset Research) that earnings on the S&P 500 will have declined by 5.6 percent during the second quarter. This expected earnings decline has accelerated to the downside; at the end of March the expected decline in earnings for the second quarter of 2016 was only a loss of 2.8 percent. If this decline or any aggregate earnings decline occurs with the second quarter earnings season it will represent the first time that the US economy has seen two consecutive quarters of earnings declines since the third and fourth quarter 2008. Thus far for the second quarter we have seen 113 companies issue forward looking guidance with 81 issuing negative guidance and 32 issuing positive guidance.

 

Global news impacting the markets:

 

Global news last week was fairly muted as there were reports from the International Monetary Fund (IMF) and the European Central Bank (ECB) addressing future expectations for Europe. The IMF released a report last week that lowered the overall expected growth for the Eurozone for 2017 from 1.6 percent down to 1.4 percent with the primary reason for the change being the Brexit vote and uncertainty over the future of trade between the UK and the EU. However, the potential impact of the Brexit vote on the overall EU is very difficult to determine and the potential impact figures vary wildly depending on where you look. The ECB released its latest meeting minutes last week and within them investors were able to see some of the discussion about the upcoming potential Brexit vote (the vote occurred after the ECB meeting) and how a vote to leave could impact the EU overall. There was also an interesting section in which the ECB noted concern regarding the general lack of inflation, despite all of the easy money it is pushing into the financial system. Typically, when a central bank is pumping millions of dollar or Euros or whatever the local currency may be into the system, prices increase because there is more money in the economic system chasing the same quantity of goods. Despite billions of Euros having been added to the European economy over the past few years, the ECB has failed to get much, if any, movement in inflation.

 

Technical market review:

 

The charts below show each of the three major indexes, plus the VIX, drawn with green lines. The red lines on the three major indexes depict the closest resistance levels, as represented by points that have been tested on each index several times in the last 6 months. The blue lines represent the closest level of support for each of the indexes, established by points that the markets have touched in the past prior to bouncing higher. For the VIX, the red line remains the rolling 52-week average level of the VIX.

4 charts combined 7-11-16

In the charts above, though it is a little difficult to see, two of the three indexes managed to break out above the resistance levels of their respective trading ranges on Friday last week after the markets rallied on the jobs data. Both the S&P 500 (upper left pane above) and the Dow (upper right pane above) are virtually tied in terms of simple technical strength. Both are above their resistance levels and both are making new highs as of Friday. The breakout occurred just a short time after having recently broken through the trading range to the downside directly following the Brexit vote in the UK. Having broken below and now breaking above, it is pretty easy to make the case that the trading range is likely just widening, more so than forming any real trend. The NASDAQ (lower left pane above) has made it to the resistance level of the trading range, but has so far failed to break above, leaving the index in third place in terms of technical strength. While the indexes were moving higher last week, the VIX was continuing to push lower after falling more than 40 percent two weeks ago. Last week the VIX moved lower by 10.63 percent and now sits at 13.20, which is very close to the lowest level that we have seen in 2016. The lowest point that the VIX has reached so far during 2016 was 13.20 on April 1st 2016. The VIX looks like it could have overshot a little to the downside given the uncertainty surrounding the Brexit vote and weakness being seen in parts of Asia.

 

Market Statistics:

 

Last week turned out to be a positive week for the US financial markets, despite the trading week being shortened by the Fourth of July holiday:

 

Index Change Volume
NASDAQ 1.94% Below Average
S&P 500 1.28% Below Average
Dow 1.10% Below Average

 

With all three of the major US indexes up more than 1 percent it was a good week for the markets by most standards. Volume was lacking, but that was expected. With Monday being a holiday there were only four trading days in the week last week, rather than the typical five. Being down a day almost always has a noticeable impact on the trading volume. However, this year the impact was very muted as each of the indexes managed to attain 90 percent of the week average. If trading volume was typical, last week it should have been near 80 percent, so we saw a good amount of volume, with much of the volume coming on Friday on the back of the jobs report.

 

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

 

Top 5 Sectors Change Bottom 5 Sectors Change
Home Construction 4.56% Financials -1.05%
Biotechnology 3.19% Natural Resources -1.10%
Medical Devices 2.72% International Real Estate -1.11%
Semiconductors 2.70% Energy -1.35%
Software 2.18% Oil & Gas Exploration -2.78%

The sectors that made the positive list last week, in terms of top performance, were some of the hardest hit sectors of the markets over the recent volatility, as investors seemed to be embracing risk last week after there was little new development in the Brexit situation. With the price of oil declining by more than 8 percent it was not surprising to see that the Oil and Gas Exploration and Energy sectors made up the bottom two spots on the list of underperforming sectors last week. Financials also made the list last week, despite the US government releasing the latest results of its stress tests, to which all but one bank easily passed, with the one bank that failed (Barclay’s) being given until December of 2016 to fix the deterioration of its balance sheet before the government takes any action.

Fixed income markets were mixed as bond traders and investors alike adjusted some of their bond positioning after the stellar jobs report on Friday:

Fixed Income Change
Long (20+ years) 2.16%
Middle (7-10 years) 0.63%
Short (less than 1 year) -0.03%
TIPS 0.42%

Currency trading volume was low last week, thanks to the holiday on the fourth. Overall, the US dollar increased by 0.69 percent against a basket of foreign currencies. The best performance of the global currencies was the Japanese Yen as it gained 2.14 percent against the value of the US dollar. While you may think that a strengthening currency is a positive thing, it is not positive in this case as a weak Yen has been the key to the economic plan in Japan as it tries to boost its economy through exporting goods and services. The weakest of the major global currencies last week was the British Pound, for the third week in a row, as it declined by 2.56 percent against the value of the US dollar. With the uncertainty surrounding what will happen next with the UK, it would not be surprising to see the Pound continue to struggle against many of the other global currencies as currency traders typically do not like long-term political uncertainty affecting their trades.

Commodities were mixed last week, as precious metals advanced, while agriculture declined in value:

Metals Change Commodities Change
Gold 1.64% Oil -8.06%
Silver 2.56% Livestock -3.40%
Copper -5.36% Grains -3.21%
Agriculture -2.50%

The overall Goldman Sachs Commodity Index declined by 5.47 percent last week, as Oil decreased 8.06 percent. Oil decreased after various reports out of the US showed our reserves increasing more than anticipated headed into the summer months here in the US. The major precious metals were positive last week with Gold advancing 1.64 percent, while Silver moved higher by 2.56 percent as the safe haven aspects of the two metals continued to see demand. The more industrially used Copper decreased by 5.36 percent, which interestingly enough puts it almost exactly back where it was two weeks ago. Soft commodities were weak last week with Agriculture overall falling 2.50 percent, while Livestock declined 3.40 percent and Grains declined 3.21 percent over the course of the week.

Top 2 Indexes Country Change Bottom 2 Indexes Country Change
CASE 30 Index Egypt 3.5 % Nikkei 225 Index Japan -3.7 %
BUX Index Hungary 2.6 % Caracas General Index Venezuela -5.6 %

Last week, the global indexes were split almost down the middle in terms of gains and losses for the week. The best performing index last week was found in Egypt, the CASE 30 Index, which turned in a gain of 3.5 percent for the week. The worst performing index for the second week in a row last week was found in Venezuela, the Caracas General Index, which turned in a loss of 5.6 percent. The situation in Venezuela only seems to be getting worse with some residents being forced to go into neighboring countries to buy basic food staples as shortages have made them very scarce in most of Venezuela.

The VIX has now officially given back all of the upward movements seen in the immediate aftermath of the Brexit vote as it moved lower by an additional 10.63 percent last week.  The current reading of 13.20 implies that a move of 3.81 percent is likely to occur over the next 30 days. With all of the uncertainty surrounding the Brexit vote and what it means for the future of the UK and the EU overall, it seems the VIX is very low, but that could be attributed to the fact that the VIX looks out only 30 days and the likelihood of anything happening with the Brexit vote over the next 30 days is in fact very low as well.

For the shortened trading week ending on 7/8/2016, returns in the hybrid hypothetical models* (net of a 1% annual management fee) were as follows:

  Last Week 2016 YTD Since 6/30/2015
Aggressive Model 0.37 % 4.98 % 9.49 %
Aggressive Benchmark -0.02 % 0.44 % -4.67 %
Growth Model 0.44 % 4.86 % 8.36 %
Growth Benchmark -0.01  % 0.48 % -3.43 %
Moderate Model 0.50 % 4.75 % 7.64 %
Moderate Benchmark -0.01 % 0.45 % -2.27 %
Income Model 0.54 % 5.36 % 8.13 %
Income Benchmark 0.00 % 0.34 % -0.95 %
S&P 500 1.28 % 4.21 % 3.24 %

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

 

There were no changes made to the hybrid model over the course of the previous week. The markets seem to have gotten a little ahead of themselves with the recent rally as they are pricing in what needs to be a very unexpectedly positive second quarter earnings season to justify the current levels of many stocks. We will likely see many companies and a few sectors in aggregate fall short of expectations. It is this type of opportunity that we are watching for to add to positions or initiate new positions. The areas of most interest currently remain mid-caps and healthcare.

 

Economic Release Calendar:

 

Last week was a shortened summer week for the economic calendar in terms of the number of releases, but there were three releases that beat expectations (highlighted in green below) and none than missed market expectations:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Positive 7/6/2016 ISM Services June 2016 56.5 53.3
Neutral 7/6/2016 FOMC Minutes Previous Meeting N/A N/A
Neutral 7/7/2016 ADP Employment Change June 2016 172K 152K
Positive 7/8/2016 Nonfarm Payrolls June 2016 287K 175K
Positive 7/8/2016 Nonfarm Private Payrolls June 2016 268K 170K
Slightly Negative 7/8/2016 Unemployment Rate June 2016 4.9% 4.8%

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

 

Last week the economic news releases started on Wednesday with the release of the services side of the ISM index, which came in better than anticipated with a reading of 56.5 compared to the expected 53.3 reading. The meeting minutes from the June FOMC meeting were also released on Wednesday, but held little new information and ended up having no noticeable impact on the overall markets. On Thursday the first of the employment data for the week was released with the ADP employment change figures for the month of June, which showed a gain of 172,000 jobs, higher than the expected 152,000 jobs. This was a good indicator that the jobs number released on Friday may end up better than expected. On Friday the government released a trove of information about the US employment situation with the biggest releases being the surprise payroll figures as both figures beat expectations by nearly 100,000 jobs or more. As explained above, this came after the dismal revision to the already poor May figures. Overall, the unemployment rate increased from 4.7 to 4.9 percent, but this was largely due to the increase in the labor force participation rate, which went from 62.6 up to 62.7 percent. The U6 unemployment rate went from 9.7 percent down to 9.6 percent in a sign that the rate that the Fed likes to look at showed improvement as well as the payroll figures.

 

This week is a typical summer trading week and there are a relatively small number of economic calendar releases, but there are several that could impact the overall markets (highlighted in green below):

 

Date Release Release Range Market Expectation
7/14/2016 PPI June 2016 0.30%
7/14/2016 Core PPI June 2016 0.10%
7/15/2016 Empire Manufacturing July 2016 5
7/15/2016 Retail Sales June 2016 0.20%
7/15/2016 Retail Sales ex-auto June 2016 0.40%
7/15/2016 CPI June 2016 0.30%
7/15/2016 Core CPI June 2016 0.20%
7/15/2016 University of Michigan Consumer Sentiment Index July 2016 93

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

 

Typically the price indexes, both the Producer Price Index and the consumer Price Index, do not impact the overall direction of the financial markets, but this week could be the exception, as they could provide enough of a push to get the odds of a Fed rate hike this year to increase in a meaningful way. Currently, inflation is running very low in the US economy and the price indexes are one of the first places inflation would be seen in the data released by the government. Expectations, however, for the release of the Producer Price index, both overall and core readings, are for very little inflation being seen. On Friday the Empire Manufacturing index for the month of July is set to be released with expectations of a reading of 5, which is very close to the inflection point of zero between expansion and contraction. Barring this release missing expectations widely, retail sales will likely be the focal point of the day on Friday. Retail sales for the month of June are due out on Friday with expectations that sales will have increased by a measly 0.2 percent during the month, while sales excluding auto sales will have increased by 0.4 percent. Both of these retail sales readings are extremely low and susceptible to dipping under zero, which could cause a negative market reaction. Also released on Friday is the consumer price index for the month of June, which like the PPI earlier in the week is expected to show very weak inflation. Wrapping up the week on Friday is the release of the University of Michigan’s Consumer Sentiment index for the month of July (first estimate), which is expected to show no change over the reading at the end of June. In addition to the scheduled economic news releases this week there are nine speeches by Fed officials that the markets will likely be watching very closely, to see if it drops any hints as to how the Fed is thinking about moving forward in light of recent global events that could impact global growth in 2016 and 2017.

 

Interesting Fact What’s in a rating?

 

There were 60 AAA-rated companies by the S&P rating agency in 1980, a number that fell to 30 by 1995, six by 2008 and down to just two as of the second quarter of 2016. The two companies are Johnson and Johnson as well as Microsoft.

 

Source: Fortune         

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