For a PDF version of the below commentary please click here Weekly Letter 4-20-2015

Commentary at a glance:

-Major US indexes pushed lower last week due to a sharp decline seen on Friday.

-China is making changes to combat the overheated nature of its financial markets.

-Oil saw the largest weekly increase in more than four years.

-Greece is once again making negative headlines—will this be the one?

-The first Fed interest rate move is still expected to occur in September of this year.

 

Market Wrap-Up: All three of the major US indexes remain range bound, giving up all of their weekly gain on Friday after making it near the upper bound of their trading ranges. While the indexes were lower the VIX moved off of the lowest point seen in 2015 so far and closed the week more than 10 percent higher than it started. The charts below are of the three major US indexes in green with their respective wide trading ranges drawn by the red lines. The VIX (lower right pane below) is drawn with the index in green and the one year average level of the VIX drawn in red:

4 charts 4-20-15

Just as it looked like a breakout may be forming, the markets reminded investors that what it gives with one hand it can take away with the other. Going into Friday last week the NASDAQ (lower left chart above) looked like it was going to break above and stay above the upper bound of its trading range, but this was not to be the case as the index fell the most in a single day since March 25th. The NASDAQ had once again gotten to within a very small distance from the all time high, which has so far stood since the technology bubble of 2000. The S&P 500 (upper left chart above) was also moving along higher for the week until Friday came along, falling short of a minor resistance level and well short of the upper bound of its most recent trading range. We saw roughly the same action on the Dow (upper right pane above) as we saw on the S&P 500 in terms of hitting a specific point and then reversing course and moving lower. There were several reasons given for the decline seen on Friday with China bearing the brunt of the accusations, as mentioned below in the international news section. A second reason for the decline was that Greece may actually be on the edge of defaulting on its debts. This story has played out numerous times in the past few months, so I don’t know why it should be given any more credibility this time around than any of the others. Another potential reason for the decline is that the markets need to let off a little steam going into earnings season. Earnings season for the first quarter of 2015 is supposed to be pretty bad when compared to the fourth quarter of 2014, so investors carrying healthy gains into this time of year may have just taken the relatively high levels seen early last week and booked profits. Another reason I will mention is one that rose in popularity last week and it is that the market just wanted to move the way that it did; no other reason needed!

 

Oil could have also played a part in the movement of the markets last week as oil jumped by the most in a week that it has moved since the week of February 25th, 2011. With oil moving more than 8 percent higher it was not surprising to see the value of the US dollar moved lower, as the international standard for the price of a barrel of oil is in US dollars. Have we seen the bottom in oil, to be followed by prices continually moving up? It seems highly unlikely; much of the move last week was caused by a report out of the US government that showed oil stock piles increasing by less than was expected. This was seen as the “catalyst” for oil prices moving higher. There was not an escalation in fighting in oil producing countries, nor was there some large increase in demand or a shortage of supply. The longer run forecasts I have seen recently are still calling for oil to stay around $55 per barrel through at least the end of 2015, barring some exogenous event driving prices higher.

 

Where the markets will go from here is a question I received several times over the course of the previous week, so I want to address it. Given both the technical and fundamental positions of the major indexes in the US it seems we will remain range bound for the foreseeable future. Earnings season will provide some positive and negative surprises that will likely balance each other out. The situation in Greece could come apart, but even if it does Greece just doesn’t matter all that much to the global financial markets. The rising US dollar seems to be here to stay, as the US is in an entirely different stage of the economic cycle than most of the rest of the developed world. This will be very beneficial to companies that import goods from abroad and not so positive for companies that export their goods from the US as these goods will be much more expensive than they would have been a year ago after accounting for currency movements. China is the real wild card in the global economy. The country is actively trying to tie into other countries’ economies; look at the deals with Mongolia, Russia and the latest with Pakistan. China is trying to tie up the countries near it in deals that make it harder for the US to do business and in some cases China is providing support where the US simply will not due to a lack of desire on the part of the US. The Chinese economy is growing at a 7 percent rate, the slowest in many years, but that only means the government is motivated to look at all angles in which the country can do better financially and we are starting to see the government take action.

 

National News: National news last week was all about earnings season for the first quarter of 2015. There were headlines about where Hillary Clinton decided to eat lunch on her campaign trail and speculation about when the Fed will increase interest rates, but the markets seemed to categorically ignore all of those and focus instead on earnings. Last week was the second week of earnings season for the first quarter of 2015 and financial companies were in the spotlight. Below is a table of the better known companies that released earnings last week with earnings that missed expectations highlighted in red, while earnings that beat expectations by more than 10 percent are highlighted in green:

 

American Express 8% General Electric 3% Netflix 15%
Bank of America -7% Goldman Sachs 42% Philip Morris International 14%
BlackRock 8% Honeywell 1% Reynolds American 9%
Blackstone Group 30% Intel 3% SanDisk -15%
Charles Schwab -8% J B Hunt Transport 8% Schlumberger NV 10%
Citigroup 9% Johnson & Johnson 1% Sherwin-Williams -1%
CSX 0% JPMorgan Chase 4% U.S. Bancorp 0%
Delta Air Lines 2% Kinder Morgan 4% UnitedHealth 10%
Fastenal 2% Mattel 11% Wells Fargo 6%

 

There is more green above than red which is positive, but remember that the expectations companies are either beating or missing are the expectations that were set very low when compared to last quarter. The announcement that stands out the most in the above table is the earnings of Goldman Sachs, which saw its highest earnings for a quarter in the past four years. Investment banking was the strongest division of the company, which makes sense given the number of IPOs and merger and acquisition deals we saw over the quarter and Goldman no doubt had a hand in many of them. On the negative side, SanDisk had a very rough quarter. Business at SanDisk is becoming very difficult with both the strength of competitors in the hard disc space and weakened foreign sales attributed to the appreciation in the value of the US dollar.

 

According to Factset Research, we have now seen 56 (11 percent) of the S&P 500 companies release their results for the first quarter of 2015. Of the 56 that have released, 77 percent have met or beaten earnings estimates, while 23 percent have fallen short of expectations. This 77 percent is a very good start to the quarter as it is higher than it was for the fourth quarter of 2014, which you may remember ended with 75 percent of companies beating earnings expectations. However, as stated before, their earnings expectations numbers are the heavily revised downward figures. This makes the 23 percent who have fallen short of even these low expectations even more worrisome. When looking at revenue of the companies that have reported, 46 percent of the companies have beaten estimates. Revenues are harder to adjust as there is less financial wizardry that can be done to make things look better than they really are. 46 percent beating revenue estimates is a poor number. By comparison, fourth quarter 2014 saw 58 percent of companies beat revenues expectations. In the grand scheme of things investors should look closer at trends in revenue, as opposed to the earnings, and revenues have been a cause for a little concern at this point in the first quarter 2015 earnings cycle. Both of the above mentioned figures are likely to change over the next few weeks as the sheer number of companies releasing earnings will likely sway the overall figures.

 

This week is the start of full swing earnings season as there are nearly 1,000 companies set to report their earnings for the first quarter of 2015. Below is a table of the better known companies that will release their earnings this week, with the releases that have the most potential to impact the markets highlighted in green:

 

3M Chubb Hershey PulteGroup
Abbott Laboratories Coca-Cola IBM Raytheon
Alaska Air D.R. Horton Juniper Networks RLI
Altera Domino’s Pizza Kansas City Southern Sigma-Aldrich
Altria Dow Chemical Kimberly-Clark Simon Property
Amazon Dr Pepper Snapple Knight Transportation Six Flags
Amgen Dunkin’ Brands Manpower Snap-On
Arthur J. Gallagher E*TRADE McDonald’s Southwest Airlines
AT&T eBay Meredith Southwestern Energy
Autoliv Eli Lilly Microsoft Starbucks
Baker Hughes Ethan Allen Interiors Morgan Stanley Stryker
Bank of New York Facebook NetSuite Texas Instruments
Barnes Freeport-McMoRan Newmont Mining Tupperware Brands
BJ’s Restaurants General Motors Nucor Under Armour
Boeing Genuine Parts O’Reilly Automotive United Technologies
Cabela’s Halliburton Pepsi Xerox
Callaway Golf Hanesbrands Piper Jaffray Yahoo!
Caterpillar Harley-Davidson Procter & Gamble Yum! Brands

 

This week really is a hodgepodge of companies releasing earnings. There are a few of the major players in technology such as Amazon, IBM and Microsoft and some of the major industrial companies such as 3M, Caterpillar and Dow Chemical. Consumer facing companies include McDonald’s (which will be closely watched with the new CEO having taken over during the quarter), eBay, Coca-Cola and Pepsi. With such a wide range of companies releasing their earnings this week we should get a pretty good feel for how the quarter overall is going to go after the conclusion of the week.

 

International News: International news focused on two topics over the course of the previous week, one being China and the other being the thorn in Europe’s side—Greece. China made two major moves over the course of the previous week, both of which could have very long term impacts on the markets. The first move was that the China Security Regulatory Commission made a few major changes to the leverage allowed on margin trading accounts, while at the same time shutting down a few key shadow financing schemes that some investors were using to help increase the amount of money they had to invest. This was done primarily because of the drastic run up seen in the main Chinese stock markets over the past 6 months. The Shanghai Se Composite index has increased about 80 percent in the past 6 months and all of this was done on very little strength in the underlying economy, an economy that just last week was shown to grow at the slowest pace in the past 6 years. As the government was taking away with one hand it was giving with another. On Sunday the government in China announced that it was lowering the reserve requirement ratio on banks by 1 percent down to 18.5 percent, which may seem like a small amount, but will give the banks a little more money to lend to borrowers, if the borrowers have enough credit to qualify for the loans. Both of the moves in China over the past week have been somewhat reactive, in that the government is seeing issues and then trying to negate them, but the government is taking almost no steps to shore up the underlying financial problems that led to the issues arising. If every day individuals see the financial markets in China as the only way for them to make it big time in China, they will find ways to invest all they can plus a little more. If the government took actions such as taxing financial gains much more heavily it may do more to stop the speculation than the actions taken last week. Speaking of actions needing to be taken, Greece is once again in the hot seat (and probably never left it).

 

Greece is starting to make more noise about running out of money and needing further bailout funds in order to meet payment obligations as soon as this week. This story is really starting to be like the boy who cried wolf too many times. At some point Greece really will be running out of money, but currently it is impossible to tell if this is the time or if next month might be the time. In an interesting turn of events, which only started to be rumored last week, the Central Bank of Greece ordered all public entities to store all cash reserves with the central bank. This seems like a desperate measure given the fact that the Greek parliament also passed a bill last week that allows the government to borrow funds from government bodies such as the Central Bank to make payments on the Greek debts. While this plan of “robbing Peter to pay Paul” may work in the short term, it will not work for an extended period of time. At some point the Greek government will have to come up with a viable plan as to how Greece will go about structural reforms that will correct the financial imbalances that permeate the Greek economy. While the global financial markets have not hit the panic button on Greece actually defaulting on its debts this time around, the situation is becoming more and more worrisome, as depicted by the increase in the yield on Greek 10-year bonds, which are charted to the right in a chart from Bloomberg.

Greek yeild 4-20-15There is a little spike higher in the chart over the past year each time worries about Greece running out of cash made headlines. After each spike cash has been found and payments made, causing the yields to decline. The market is not being fooled, however, as the overall trend over the past 6 months has been upward with yields moving from 6 percent up to more than 12 percent currently. Adding to the speculation or political posturing this time around is a story out of Germany that Germany is preparing for how it could handle a default by Greece that would still allow the country to remain in the EU and on the Euro as its currency. While I highly doubt this is the first time the financial minds in Germany have played out this scenario, it is interesting that it is now making headlines. Two risks that seem a bit understated in this whole situation with Germany and Greece is that the individuals within each country may just get fed up and force a change in government that derails the entire situation. The current party in charge in Greece won the election by running on a “no further bailouts” and a “we won’t pay” platform, both of which were just political statements that have been broken numerous times in the short time the new government has been in power. At some point the electorate will likely stand up and say “you are not keeping your promises to us, so we would like to replace you with yet another government.” The same situation could unfold in Germany as the German people are getting tired of being dragged into the mud with Greece and continually having to bailout the country. This situation is unlikely to come to an end any time soon as kicking the can down the road is the preferred method of dealing with the issue as it is politically very untenable for either party to do what it would take to fix the situation.

 

Market Statistics: In keeping with the trend of moving up one week only to move lower the following week, last week was no exception as the three major US indexes moved lower after a strong week two weeks ago.

 

Index Change Volume
S&P 500 -0.99% Average
Dow -1.28% Above Average
NASDAQ -1.28% Below Average

 

With the markets moving lower last week on concerns about both China and Greece, as mentioned above, it looks like we will remain range bound for the foreseeable future on the US indexes. Nearly all of the negative move of the week last week occurred on Friday, as investors reacted to several headlines out of Europe and Asia.

 

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
Energy 3.03% Transportation -1.47%
Natural Resources 2.10% Medical Devices -1.33%
Energy 2.01% Industrials -1.30%
Oil & Gas Exploration 2.01% Utilities -1.30%
Basic Materials 0.17% Healthcare -1.19%

Energy and anything remotely energy related turned in strong performance last week as the price of oil moved significantly higher, pulling up all of the oil related industries such as oil and gas exploration, natural resources and basic materials. On the flip side, last week saw investors pull money out of sectors of the markets that had been performing very well during the recent market movements, such as transportation, industrials, utilities and healthcare. Why the money moved out of the above mentioned investments is anyone’s guess, but it could have been investors pulling some profits as we move further into earnings season, a time when volatility is expected to increase.

On top of the standard Fed speculation about when the Fed will start to increase interest rates, last week also saw a resurgence of fear in the fixed income market over Greece and its continued financial hardship and lack of financial reforms:

Fixed Income Change
Long (20+ years) 1.41%
Middle (7-10 years) 0.83%
Short (less than 1 year) 0.00%
TIPS 1.35%

Much of the movement in the US fixed income market was due to the plunging yields in countries such as Germany. The yield on the German Bunds out to 7 years in maturity are currently running a negative yield. This means that anyone investing in them will receive less money at maturity than they put into the bonds—but at least it is relatively safe! Despite seeing large moves into US debt last week the US dollar slid by more than two percent, declining by 2.06 percent against a basket of international currencies, mainly due to the upward move seen in the price of oil. The best performing currency globally last week was the Swiss Franc, which increased by 3.07 percent as investors fled the Euro, yet wanted to remain invested in a European currency. The Japanese Yen was the weakest of the global currencies as it gained only 1.05 percent against the value of the US dollar.

Commodities overall were mixed last week as oil jumped higher:

Metals Change Commodities Change
Gold -0.32% Oil 8.58%
Silver -1.33% Livestock -0.89%
Copper 2.17% Grains -1.22%
Agriculture -0.31%

The overall Goldman Sachs Commodity Index turned in a gain of 4.57 percent last week as oil rallied by 8.58 percent. As mentioned above in the markets section, much of the move in the price of oil was due to a supply report put out by the US government in which crude supplies were shown to have only increased by half of what the market had been expecting. Metals were mixed last week with Silver giving up 1.33 percent, while Gold was down 0.32 percent and Copper bucked the trend, increasing 2.17 percent. Soft commodities all moved lower last week, continuing the slide they have been on for the past 2 weeks.

On the international front last week, the best performance globally was found in Asia. The best performing index last week was the Shanghai based Se Composite Index, which gained 6.27 percent. The lowest performing index last week was found in Germany and was the Frankfurt based Dax Index, which gave up 5.54 percent over fears that Greece may finally default in the near future.

After declining by nearly 15 percent two weeks ago it was only fitting that the VIX last week should bounce back by more than 10 percent. Going into Friday last week the VIX was nearly at the lowest point it has hit thus far during 2015. All of that changed on Friday when the VIX jumped higher by more than 10 percent and had an intraday move in excess of 19 percent. At the current level of 13.89 the VIX is implying a move of 4.01 percent over the course of the next 30 days. As always, the direction of the move is unknown.

For the trading week ending on 4/17/2015, returns in FSI’s hypothetical models* (net of a 1% annual management fee) were as follows:

Last Week Year to Date
Aggressive Model -1.73 % 1.18 %
Aggressive Benchmark -0.40 % 3.66 %
Growth Model -1.36 % 0.57 %
Growth Benchmark -0.30  % 2.89 %
Moderate Model -0.99 % 0.15 %
Moderate Benchmark -0.22 % 2.09 %
Income Model -0.82 % 0.27 %
Income Benchmark -0.11 % 1.09 %

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

 

We made only one change to our models over the course of the previous week and that was to add to our already existing position in Mid Caps, through the use of the Schwab Midcap ETF ticker SCHM. Much of the rally last week in the financial markets seems to be driven by the energy sector, as it may have come off of a very low bottom. Some of you may notice that we have been underperforming the broad indexes over the past two weeks; a large percentage of this underperformance has been due to our underweighting to energy and industries related to energy. The closest investments we have to energy is a few utilities companies we own, other than that we have nominal investments through mutual funds and ETFs in the sector. We continue to evaluate various investment opportunities in the energy sector, but are finding very few that look worthy of an investment, given the risks from earnings season that seem to be on the horizon for the sector as they report a quarter that saw rig counts plummet and oil prices remain much lower than the recent quarter for much of the quarter.

 

Economic News:  Last week was a very busy week for economic news releases with the focus of the week being on the US consumer. There was a single release that missed market expectations by a significant amount (highlighted in red below) and no releases that significantly beat market expectations to the upside:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Neutral 4/14/2015 Retail Sales March 2015 0.9% 1.0%
Neutral 4/14/2015 Retail Sales ex-auto March 2015 0.5% 0.6%
Neutral 4/14/2015 PPI March 2015 0.2% 0.2%
Neutral 4/14/2015 Core PPI March 2015 0.2% 0.1%
Negative 4/15/2015 Empire Manufacturing April 2015 -1.19 7.00
Neutral 4/15/2015 NAHB Housing Market Index April 2015 56.00 55.00
Neutral 4/16/2015 Initial Claims Previous Week 294K 280K
Neutral 4/16/2015 Continuing Claims Previous Week 2268K 2312K
Slightly Negative 4/16/2015 Housing Starts March 2015 926K 1.04M
Neutral 4/16/2015 Building Permits March 2015 1.04M 1.08M
Slightly Positive 4/16/2015 Philadelphia Fed April 2015 7.50 6.00
Neutral 4/17/2015 CPI March 2015 0.2% 0.3%
Neutral 4/17/2015 Core CPI March 2015 0.2% 0.2%
Slightly Positive 4/17/2015 University of Michigan Consumer Sentiment Index April 2015 95.90 94.00

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

 

Last week started on Tuesday with the release of retail sales for the month of March, which came in very close to market expectations, but slightly below expectations. Also released at the same time on Tuesday was the Producer Price Index (PPI), which came in nearly on top of market expectations. On Wednesday the major negative announcement of the week was released, that being the Empire Manufacturing Index for the month of April, which was expected to show a decent amount of growth, but instead posted a contraction for the month. We have been seeing weakness now for several months in the manufacturing data and this is just the latest point in what has now turned into a worrisome trend. On Thursday the standard weekly unemployment related figures were released with initial claims a little better than expected, while continuing claims were slightly worse than expected. The first of the housing related figures for the month of March were also released with housing starts and building permits. Housing starts missed expectations, while building permits were close to expectations, leaving most options of the housing market unchanged by the new data. Later during the day on Thursday the Philly Fed released its business conditions index and it came in very close to expectations leading to little or no noticeable reaction by the markets. On Friday the data that was released was overshadowed by both China and Greece, but the Consumer Price Index (CPI) was released and showed that prices were increasing at a slower pace than most members of the Fed would like going into a time period of increasing interest rates. Wrapping up the week on Friday was the release of the University of Michigan’s Consumer Sentiment Index for the month of April (first estimate), which indicated that consumers were more positive about their spending in April than they were in March. Some of this confidence may have been due to tax refund checks coming in the mail and people having a little extra money during the month of spend.

 

This week is a slow week for economic news releases. The releases highlighted below have the potential to move the overall markets on the day they are released:

 

Date Release Release Range Market Expectation
4/22/2015 Existing Home Sales March 2015 5.05M
4/23/2015 Initial Claims Previous Week 288K
4/23/2015 Continuing Claims Previous Week 2330K
4/23/2015 New Home Sales March 2015 520K
4/24/2015 Durable Orders March 2015 0.50%
4/24/2015 Durable Goods -ex transportation March 2015 0.40%

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

 

This week starts on Wednesday with the release of existing home sales for the month of March, which is expected to come in just over the 5 million level. Given the real estate figures we saw last week this figure looks in line with what we have been seeing. On Thursday the standard weekly unemployment related figures are set to be released with expectations of initial claims falling with continuing claims likely to have increased a little over the past week. Also released on Thursday is the new home sales figure for the month of March, which will likely move with the same direction and magnitude as the existing homes sales figure earlier in the week. On Friday the two releases that have the greatest potential to move the markets are set to be released, those being durable goods orders. Durable goods orders are a measure of durable goods: big ticket items such as house hold appliances, cars and planes. They are a good signal about the health of the overall economy because they are typically items that do not just break, but rather wear out and are replaced over time. It is for this reason that they are a good signal. If something does not have to be replaced immediately during economic hard times, people will put it off. If times are good and the economy is doing well, people are more willing to outlay larger sums of money on items that need to be replaced. Expectations are for only half a percent increase during March, which is low on the overall durable goods orders. Orders excluding transportation are expected to increase even less at 0.4 percent. While these orders can swing around a lot with the airline companies buying planes at odd points during the year, the market will be watching very closely to see that these orders do not go negative as this would be a very negative sign for the health of the US economy. If we see a negative print, however, the markets may react positively as it would further signal that the Fed may not be able to start increasing interest rates in June, having to put off the rate increase until September at the earliest.

 

Fun fact of the week—China materials demand

 

According to author and Scholar Michael Pettis, a Senior Associate at the Carnegie Endowment for International Peace and a finance professor at Peking University’s Guanghua School of Management, China demands the following global percentages of raw materials, while only having 19 percent of the total global population:

Cement = 53.2% of global demand

Iron ore = 47.7%

Coal = 46.9%

Pigs = 46.4%

Steel = 45.4%

Lead = 44.6%

Zinc = 41.3%

Aluminum = 40.6%

Copper = 38.9%

Eggs = 37.2%

Nickel = 36.3%

Source: Business Insider http://www.businessinsider.com/facts-chinese-consumption-2011-5#ixzz3XsZp79ge

For a PDF version of the below commentary please click here Weekly Letter 4-13-2015

Commentary at a glance:

-Major US indexes rallied last week, but remain range bound.

-VIX closed the week at the lowest point so far during 2015.

-Hillary Clinton has officially jumped into the 2016 Presidential race.

-Earnings season for the first quarter of 2015 has officially kicked off.

-The first fed interest rate move is still expected to be in September of this year.

 

Market Wrap-Up: All three of the major US indexes remain range bound after they gained in value last week, but had started the week near the low end of the trading range. While the indexes were moving higher the VIX was moving lower in one of the steepest declines we have seen so far during 2015. The charts below are of the three major US indexes in green with their respective wide trading ranges drawn by the red lines. The VIX (lower right pane below) is drawn with the index in green and the one year average level of the VIX drawn in red:

4 charts 4-13-15

The NASDAQ (lower left pane above) is the strongest of the three major indexes when looking from a technical perspective. It is now very close to the upper bound of the most recent trading range and could challenge the level at some time this week. If it successfully breaks above the upper bound level there is one other small point of resistance that would be considered: the high point reached during the middle of March. This level, however, also corresponds very closely with the all time high level for the NASDAQ, which was reached back before the technology bubble of 2000. Chances are that the NASDAQ will pull up to at least this level as traders and investors alike enjoy seeing investments make new all time highs. This one will have been more than 15 years in the making. The S&P 500 (upper left pane above) and the Dow (upper right pane above) are virtually tied from a technical perspective, closing last week in the upper half of the trading range. As far as upside resistance, both the S&P 500 and the Dow will potentially encounter resistance both at the high point from last month as well as at the red line, which is drawn above at the top of the trading range. While all of these moves higher were occurring last week, the VIX was headed in the opposite direction, falling to the lowest point we have seen so far during 2015, well below the average level for the VIX over the past 52 weeks. The two most common questions I have been receiving lately have been: where do we go from here and are we overvalued on the markets?

 

At this point the markets seem like they are at lofty valuations; this is due to a number of factors. The first factor is that the era of a zero rate for the Fed funds rate will be shortly coming to an end. Second is that earnings season for the first quarter of 2015 is starting and it is expected that the overall earnings for the various indexes will see one of the sharpest contractions we have seen for several years, with much of the decline due to the energy sector, which has revised expectations lower by so much that most companies will literally fall over the bar that has been set at such a low level. Third is that the market is not cheap, as measured by the Forward PE ratio. The PE ratio is a measure of current price divided by earnings. In the case of the index, all of the individual component companies are added together to arrive at the overall PE ratio for the index. The Forward PE ratio looks at the projected earnings for the next 12 months and uses this figure as the divisor. When the Forward PE ratio is low the market is considered “cheap” and, vice versa, when the PE ratio is large it is considered expensive. According to JP Morgan, the current Forward PE ratio for the S&P 500 is 16.9, which is above the 25 year average of 15.7. To give a little perspective, the Forward PE ratio for the S&P 500 briefly went under 10 back at the market lows of 2009. The fourth reason for the lofty valuation is that the US economy is not growing at a pace that is consistent with the level of growth we have been seeing in many of the main companies that are the driving force behind the recent market movements. In looking at everything above, it does not mean that the market will inevitably correct, but rather that the markets pushing substantially higher from here seems unlikely until we get some much needed change. Going forward we are likely to see the major indexes stay within or very close to their respective trading ranges. This also plays into the level of the VIX as it also does not see movements in the next 30 days that would likely push any of the indexes out of their trading ranges.

 

National News: National news last week was all about politics and who will or who will not be running for President in 2016. Hillary Clinton made the announcement over the weekend that she will be seeking the Democratic nomination for the Presidential election in 2016. While she looks to be a formidable opponent, she did lose out to a relatively unknown contender back in 2008, named Barack Obama, as well as former Senator John Edwards in several key battle ground states leading to the official nomination, so it may not be as much of a shoe-in for Hillary as some people seem to be anticipating this time around. According to the latest figures from the New York Times other Democratic contenders include Martin O’Malley, Jim Webb and Lincoln Chafee, all of which would have a very hard time coming up with the funds needed to go head to head with Clinton. According to a senior adviser with the Ready for Hillary campaign, it is estimated internally that the combined 2016 election season could cost as much as $1.7 billion, only about $56 million more than the 2008 campaign for President. If the number of voters remains pretty steady between 2016 and 2008, the turnout would likely be about 57 percent of eligible voters, or 132 million people. The resulting total cost per vote could come in as high as $13 per vote by the time all is said and done. The Republican side of the ticket looks much more interesting as there are a number of candidates and potential candidates.

 

For the Republicans we have seen Ted Cruz, Rand Paul and Marco Rubio all announce that they are seeking the Republican nomination for President. Yet to announce is Jeb Bush, Scott Walker, Chris Christie, Rick Perry and Bobby Jindal, as well as a host of others who may or may not announce their candidacy. It will be a full scale dog fight on the Republican side and a fight that will likely lead to the final candidate being much weaker than if they had not gone through the nomination process within the Republican Party. The early polls (I can’t stress enough that these are very early), show that Clinton is the front runner against any of the Republican candidates, as she has been even prior to her announcing. The real problem for the 2016 election that all candidate face regardless of which party they belong too is that many Americans just do not think the government is functioning the way it should be and they point to all politicians for causing the problems, not just one side or the other. When every day people see threats of a government shutdown being used as a political tool or the amount of pork that is added to nearly every bill that gets through to a vote, they are not happy about the state of our political system. Maybe that is why Frank Underwood is receiving many write in nominations in polls around the country, because at least in his House of Cards world he seems to get things done! The markets will be watching the upcoming election somewhat lazily for the next few months and get much more serious about it early next year as anything that is said by any of the candidates at the current time will likely not be taken seriously.

 

More important to the markets than politics currently is the results from the first quarter 2015 earnings season, which have already started to roll in. Below is a table of the better known companies that released earnings last week with earnings that missed expectations highlighted in red while earnings that beat expectations by more than 10 percent are highlighted in green:

 

Alcoa 8% Family Dollar Stores 1% Rite Aid 71%
Bassett Furniture 40% Greenbrier Company 28% Walgreens 26%
Bed Bath & Beyond -1% Pier 1 Imports 3% WD-40 6%

 

Alcoa officially kicked off earnings season last week with a beat on earnings per share coming in at $0.28, while analysts had been expecting $0.26. However, the company missed expectations on revenues per share and it forecasted global aluminum demand to be lower than first thought for all of 2015. Commodities prices have been falling and with them the mining and energy stocks are likely to show that they had a rough first quarter of 2015. Alcoa appears to not be an exception. Rite-Aid and Walgreens both showed great results for the first quarter of 2015 as there was very little material impact on their earnings from the strong US dollar as much of the business is done here in the US. The only downer last week was Bed Bath & Beyond, which saw same store sales and overall revenues increase, but at a lesser rate than analysts were anticipating. It is still much too early to deduce anything about how the overall quarter will go with the small number of companies that have announced their earnings, but the quarter so far seems to be headed in the correct direction.

 

This week is a ramp up week for earnings season as we start to head toward the full swing of earnings season over the next few weeks. Below is a table of the better known companies that will release their earnings this week, with the releases that have the most potential to impact the markets highlighted in green:

American Express General Electric Netflix
Bank of America Goldman Sachs Philip Morris International
BlackRock Honeywell Reynolds American
Blackstone Group Intel SanDisk
Charles Schwab J B Hunt Transport Schlumberger NV
Citigroup Johnson & Johnson Sherwin-Williams
CSX JPMorgan Chase U.S. Bancorp
Delta Air Lines Kinder Morgan UnitedHealth
Fastenal Mattel Wells Fargo

 

This week is all about financials as there are numerous large financial institutions set to release their earnings from the first quarter of 2015. Of particular interest will be the charges that related to the strong US dollar and this, if present and meaningful, will likely cause problems for other companies that release earnings in the coming weeks. In fact, other than the impact of falling energy prices on earnings, the US dollar will be the second most watched item during this earnings season and it could have a very large impact.

 

International News: International news last week held very few headlines that the markets seemed to care about. Iran made headlines early during the week as the Supreme leader seemed to make a few headlines that undercut some of the work that had been done at the nuclear negotiations that ended two weeks ago. This may have had an impact on the price of oil and been one of the catalysts for the price movement, but it seems unlikely because anything concrete in the situation with Iran is still months if not years away from being finished. Brazil made headlines over the weekend as there were large protests against President Dilma Rousseff, as she struggles to maintain an orderly government in the face of political unrest within her country. The unrest, however, seems to be settling down a little as the crowds that rallied over the weekend against her were much smaller than they were a few short weeks ago. Most of the rest of the world was steady last week with the Europeans still fighting between themselves and Greece and with the ECB continuing to pump money into the system—a system that is broken, but not in dire need of fixing any time soon, which means that it will not even be worked on until sometime in the future when things really start to come apart.

 

Market Statistics:

Index Change Volume
NASDAQ 2.23% Below Average
S&P 500 1.70% Average
Dow 1.66% Average

 

After a flat week two weeks ago it was time for the markets to move higher last week, if they stuck with the up and down theme that seems to have pretty well solidified over the past month. The markets did not fail to keep the trend going as they moved higher over the course of the week. Volume last week was about average as we are moving into earnings season, a time when volume can be heightened on certain stocks each day as there is reaction to various announcements.

 

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 5.23% Residential Real Estate -2.71%
Pharmaceuticals 4.47% Real Estate -2.18%
Energy 3.87% Home Construction -1.43%
Oil & Gas Exploration 3.24% Telecommunications -0.83%
Natural Resources 2.98% Regional Banks -0.23%

Biotechnology and Pharmaceuticals completed the flip last week, jumping from the bottom 5 performing sectors back up to the top 5 performing sectors over the course of just a single week, thanks in large part to several merger and acquisition announcements. Energy also had a good week as oil increased by more than 5 percent, also thanks to several merger announcements that could have signaled the bottom for the price of oil. Real Estate had a tough week last week as it was the single worst sector of the markets, despite the declining interest rates on 30 year mortgages, as they fell to a multiple month low.

With nothing more than continued speculation about the Fed and when it will start to increase interest rates, last week was a pretty tame week for fixed income trading:

Fixed Income Change
Long (20+ years) -0.85%
Middle (7-10 years) -0.31%
Short (less than 1 year) 0.02%
TIPS -0.09%

With the rest of the world seemingly in a loosening stance for their currencies the US dollar was the largest benefactor last week, gaining 1.79 percent against a basket of international currencies. Moving from the worst currency two weeks ago to the best currency last week was the Australian Dollar, which gained 1.23 percent against the value of the US dollar. Much of this move was due to increasing demand for the raw materials Australia produces. Not surprising given the large amount of lending that is going on in Europe from the ECB, the Euro was the weakest of the major global currencies last week, giving up 2.82 percent against the value of the US dollar.

Commodities overall were mixed last week as oil jumped higher:

Metals Change Commodities Change
Gold 0.60% Oil 5.09%
Silver -1.56% Livestock -1.03%
Copper -0.03% Grains -2.93%
Agriculture -1.85%

The overall Goldman Sachs Commodity Index turned in a gain of 1.57 percent last week as oil rallied by 5.09 percent. As mentioned above, much of the movement in the price of oil seemed to be after the announcement from Shell that it was buying the BG group, in what may be the first of many major deals that could be coming in the oil industry if the major oil companies think the bottom for oil is now behind us. Metals were mixed last week with Silver giving up 1.56 percent, while Gold was up 0.60 percent and Copper decreased 0.03 percent. Soft commodities all moved lower last week, giving up more than 1 percent across the board as they too seem like they may have already put in a bottom for the recent downturn.

On the international front last week there were no major world indexes that declined in value. The lowest performing index last week was found in Taiwan and was the Taiwan Weight Index, which gained only 0.18 percent. Hong Kong turned in the best performance of the week as the Hang Seng Index advanced by 7.90 percent, after several holidays over the past two weeks.

The VIX plummeted last week, falling by 14.25 percent, thanks in large part to the markets moving higher and the potential pitfalls for the markets seeming to dissipate over the course of the past week. The other aspect of the markets that is helping to drive the VIX is the time of the year as we are now officially moving into summer, a time when the markets trade on typically low volume and shrug off most of the negative news. At the current level of 12.58 the VIX is implying a move of 3.63 percent over the course of the next 30 days. As always, the direction of the move is unknown.

For the trading week ending on 4/10/2015, returns in FSI’s hypothetical models* (net of a 1% annual management fee) were as follows:

Last Week Year to Date
Aggressive Model 0.89 % 2.97 %
Aggressive Benchmark 1.79 % 4.07 %
Growth Model 0.75 % 1.96 %
Growth Benchmark 1.38  % 3.20 %
Moderate Model 0.50 % 1.16 %
Moderate Benchmark 0.99 % 2.31 %
Income Model 0.32 % 1.10 %
Income Benchmark 0.50 % 1.20 %

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

 

We made several changes to our models over the course of the previous week. The first changes related to the US dollar as we lightened our position in both Profunds Rising Dollar Fund (RDPIX) as well as the Rydex Strengthening Dollar Fund (RYSBX). We also sold our position that was remaining in the Semiconductor sector as the strong performance of this sector appears to have run its course. With some of the proceeds from the various sales we initiated a position in the Wisdomtree International Dividend Hedge Equity fund. The fund invests in a broad range of companies that pay dividends around the world while at the same time taking out the currency risk associated with the countries in which the companies are domiciled. This is a good way to invest internationally while the US dollar is strengthening since it means that many of the other global currencies are moving lower. We continue to watch the oil market closely to see if there is a good entry point for an initial investment in the sector.

 

Economic News:  Last week was one of the slowest weeks we have seen in a long time for economic news releases. There was nothing new in any of the releases as they all came in very close to expectations:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Neutral 4/6/2015 ISM Services March 2015 56.50 56.90
Neutral 4/8/2015 FOMC Minutes March Meeting
Neutral 4/9/2015 Initial Claims Previous Week 281K 285K
Neutral 4/9/2015 Continuing Claims Previous Week 2304K 2395K

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

 

Last week started off on Monday with the release of the ISM Services Index, which came in almost exactly on the expected number. This data, combined with the overall ISM release from two weeks ago, seems to point to the economic slowdown really being the manufacturing side of the US economy as the services side continues to grow at a steady rate. On Wednesday the FOMC meeting minutes from the March meeting were released and held little new information. The minutes confirmed the well known thoughts that the Fed is very divided as to when to start raising interest rates. There were as many votes for the June meeting as there were for a date later than June. The market still seems to have the odds on September at this point, but as always that date could change if the economic data released over the next few months continues to show weakness. Last week wrapped up on Thursday with the release of the standard weekly unemployment related figures for the previous week, which showed that both continuing and initial jobless claims came in slightly below market expectations, but not by enough to have a noticeable impact on the overall markets.

 

After such a slow week last week, this week seems to be playing a little catch-up as there are numerous releases that could have a noticeable impact on the markets. The releases highlighted below have the potential to move the overall markets on the day they are released:

 

Date Release Release Range Market Expectation
4/14/2015 Retail Sales March 2015 1.0%
4/14/2015 Retail Sales ex-auto March 2015 0.6%
4/14/2015 PPI March 2015 0.2%
4/14/2015 Core PPI March 2015 0.1%
4/15/2015 Empire Manufacturing April 2015 7.00
4/15/2015 NAHB Housing Market Index April 2015 55.00
4/16/2015 Initial Claims Previous Week 280K
4/16/2015 Continuing Claims Previous Week 2312K
4/16/2015 Housing Starts March 2015 1.04M
4/16/2015 Building Permits March 2015 1.08M
4/16/2015 Philadelphia Fed April 2015 6.00
4/17/2015 CPI March 2015 0.3%
4/17/2015 Core CPI March 2015 0.2%
4/17/2015 University of Michigan Consumer Sentiment Index April 2015 94.00

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

 

This week starts off on Tuesday with the release of the retail sales figure for the month of March, which is expected to show a small increase of about 1 percent overall with sales excluding auto sales expected to increase by 0.6 percent. If these numbers are too high and the actual figures come in below expectations, it could be seen as bad for the economy, while good for keeping interest rates low for longer. Also released on Tuesday is the Producer Price Index (PPI) for the month of March, which is expected to show that inflation is very tame at only 0.2 percent. This is far below the level the Fed would like to see as part of their dual mandate and flies in the face of increasing interest rates. On Wednesday the latest manufacturing data is set to be released with the Empire Manufacturing index for the month of April. Expectations are for a reading of 7.0, hardly any change from the 6.9 seen during March. If this were to end up being the number it would be a positive development in the US economy as manufacturing data has recently been pretty bad. On Thursday, in addition to the standard weekly unemployment related figures, two pieces of housing information are set to be released: the housing starts and building permit data for the month of March, both of which are expected to come in at just over 1 million units. Later during the day on Thursday the Philadelphia Fed is set to release its index that measures business conditions in the greater Philly area. Expectations on the release are that things will have picked up a little during April when compared to March, and if this does not turn out to be the case it could be a negative sign for the overall US economy. On Friday the Consumer Price Index (CPI) for the month of March is set to be released with expectations that prices will have remained relatively flat at the consumer level despite the price of energy and gasoline having increased slightly. This data along with the PPI is really leaving the Fed in a tough spot; typically when inflation rates are too low the Federal Reserve would lower interest rates in order to spark demand. With rates at zero it cannot very easily lower rates without some massive round of quantitative easing. We have recently been seeing the price indexes moving ever closer to zero, at which time the Fed will have a very hard decision to make. Wrapping up the week this week is the release of the University of Michigan’s Consumer Sentiment Index for the month of April (first estimate), which is expected to show that the US consumer is more confident now than at the end of March. This index would have to have a very large deviation from expectations for the markets to really take notice. In addition to the scheduled releases there are also six different Federal Reserve officials giving speeches this week as they try to help guide the market regarding the way the Fed is currently looking at the data.

 

Fun fact of the week—Hillary Clinton was a Republican.

 

In her book Living History Hillary Clinton talks about her early political life, which was shaped by her die-hard Republican father. She even went as far as to be elected President of Wellesley College’s Young Republicans Club.

For a PDF version of the below commentary please click here  First Quarter 2015 in Review

First Quarter 2015 in Review: Volatility is the single word that best defines what occurred over the first quarter of 2015 in the global financial markets. After being lulled into thinking the market would remain calm in the face of uncertainty during the end of the fourth quarter of 2014, 2015 almost immediately started very differently. The VIX started 2015 with 23 of the first 27 days being above 17, a very impressive feat considering that the VIX was over 17 only 29 days in total during all of 2014. In addition to the volatility being seen on the VIX, volatility was even more evident on the Dow Jones Industrial average, which also started the year in a very volatile manner. In looking at the first quarter, the Dow saw more than two thirds of the trading days have intraday moves in excess of 150 points, while 20 percent of the days had intraday moves in excess of 300 points. This led investors to feel like they were on a financial rollercoaster as the markets searched for direction. There were several reasons for the heightened volatility, not the least of which was speculation about when the US Federal Reserve would increase interest rates for the first time since 2007.

 

Speculation about the US Federal Reserve is a passion for many economists that provide advice about the global financial markets; rightfully so since what the US Fed does has long reaching impacts all around the world. With quantitative easing (the Fed buying bonds) coming to an end during the fourth quarter of 2014, the next logical step is for the Fed to start increasing interest rates. Increasing rates, however, comes with its own set of problems. Potentially the largest is what it will do to the fixed income market as outstanding bonds lose value as interest rates increase, potentially bringing to an end a 30-year fixed income bull market. So what is driving the Fed’s decision? The driving forces behind the Fed’s decision are many economic variables, everything from labor market indicators to overall health indicators for the US economy as a whole as well as inflation figures. During the first quarter of 2015 the economic data points released sent mixed signals to the markets, which fueled much of the speculation about the timing of the rate hike. The labor market strengthened, in the sense that the overall unemployment rate declined from 5.7 percent in January to 5.5 percent in March, but labor force participation did not budge, coming in at 62.7 during March, which is the same level we saw in December. Wage growth or lack thereof is also a driving force behind the labor market weakness as we still see some of the weakest wage growth in the US of the last decade. All of this weakness in turn has led to slowing down in manufacturing and spending, both on the personal side and on the corporate side of the economy. Every day a new piece of economic data was released during the third quarter the market tried to digest what it meant in terms of speeding up or slowing down the timing of the rate increase. At the end of the quarter odds were that a rate hike would be coming during the September meeting of the FOMC, but as Chair Yellen has repeated many times, she will be patient and data dependant on determining when we have come to the correct time to raise interest rates. While the US was full of speculation about raising interest rates, Europe was in a whole different economic situation, one that will take several years to emerge from at best.

 

Europe is a little behind the US economically, because as the US is setting up to increase rates, Europe and the European Central Bank (ECB) in particular are just now starting their end all be all quantitative easing to try to get the European economy growing. During the first quarter of 2015 the data coming out about Europe was very poor with unemployment going up, the value of the Euro sliding, deflation being shown in several key economies and weak countries still begging for money to fix their dire economic situations. In light of this the ECB did all it could and finally had to take actions rather than just say it will “do whatever it takes.” It had to put its money where its mouth is and start buying bonds to the tune of 60 billion Euros per month for an undisclosed period of time. Will this be too little too late? Only time will tell, but for the time being it is a good start, although Europe still has a very long way to go. One of the biggest headwinds to Europe during the first quarter of 2015 was the weakness in the Euro when compared to the US dollar and other global currencies.

 

The US dollar has been doing nothing but move higher since the end of last year and through the first quarter of 2015. In total the US dollar increased in value by 7.26 percent against a basket of international currencies during the first quarter of 2015. The Euro, on the other hand, plummeted by more than 10 percent against the US dollar during the same time period. One currency that moved even more than the US dollar during the first quarter was the Swiss Franc as the Swiss stunned the global financial markets on January 15th by releasing the Swiss Franc’s peg to the Euro just before the launch of the ECB bond buying program. The move was very violent with the Franc increasing by more than 41 percent against the Euro over the course of only a few minutes. Several large currency trading firms sustained major trading losses and in a few cases entire firms were wiped out due to trades between the Swiss Franc and other currencies. The financial world lost one of the “safe” global currencies in a matter of minutes, something that does not occur frequently. Commodities moved in the opposite direction of the US dollar during the first quarter of 2015, continuing their slide from 2014.

 

Commodities in general and oil in particular had a very rough start to 2015. They continued the slide they found themselves on late last year. While oil performed relatively well, declining only 10 percent during the first quarter after falling more than 50 percent since July of 2014, other commodities such as livestock were a little less fortunate, declining more than 10 percent during the quarter. Global demand was the primary driving force behind the commodity moves throughout the quarter as slowing in Europe combined with uncertainty in both the US and China going forward led to heightened uncertainty. Violence in the Middle East with ISIS going on a land grab and a potential Arab Spring 3.0 has not seemed to cause enough concern for oil to meaningfully turn around and move higher. It seems the geopolitical situations around the world during the first quarter of 2015 also fueled volatility and uncertainty, but in general it was a pretty tame quarter.

 

ISIS made some advances in Iraq and other countries, but it currently seems that with the backing of the US, the Arab countries that are friendly to the US will be strong enough to overcome the current situation with ISIS. Islamic extremism, however, does not stop with ISIS. Throughout the quarter there were many violent events in other countries such as Yemen, Kenya, Sudan and numerous other countries. While the global financial markets were largely spared from the violent attacks during the quarter, there did seem to be an underlying current of concern growing in many of the first world countries and markets. Russia and Ukraine made up a bulk of the international headlines during the start of the quarter as they were still heavily fighting over eastern Ukraine for much of the quarter. However, the violence did deescalate once a cease fire had been agreed to by the Russians, the Rebels and the Ukrainians. China was also not forgotten during the quarter as it potentially had the greatest impact on the global commodity markets during the quarter.

 

China has been slowing down economically for the past few years, having seen its annual growth rate fall from the mid teens, down to under 10 percent and now down to about 7 percent for 2015. When the largest manufacturing country in the world sees its growth rate slow as much as China has it is no wonder the raw material prices for the materials the country imports will fall by a large amount. China, in response to the slowing down of its economy, had started taking actions such as forming the Asian Infrastructure Investment Bank (AIIB) and increasing the number of trade agreements it is partaking in with countries such as Brazil, Russia and other key countries. One thing is for sure and that is the fact that the Chinese government will do whatever it takes to keep the Chinese economy growing at the fastest pace it can, and that the Chinese economy will soon be the largest economy in the world, so keeping an eye on it from an investment point of view is very pertinent.

 

Where do all of the above points leave us? Trading in a wide trading range as the markets await further information on a wide variety of potentially impactful items.

 

Looking ahead: Looking ahead we have several key items that will likely drive the future movements of the US financial markets, the first of which is continued speculation about the timing of the Fed’s rate hike. While it does not really matter if the Fed chooses to raise rates in June, September or hold out until early 2016, the market sees this as a potential game changing move as investors start to have the ability to move back into fixed income investments and get decent rates of return, as opposed to being forced out into the equity markets to find yield on their investments. I see no end in sight for the speculation about the Fed because even once it does start to raise rates there will be speculation as to how far apart the Fed will space increases and how large or small the increases will be. The market will be hanging on each and every word prior to each and every hike as investors adjust their holdings to the “new normal” of rising rates.

 

Politics will likely become more and more impactful for the financial markets as the bickering in Washington DC between Republicans and Democrats is only likely to become worse as we move closer and closer to the Presidential elections to be held in 2016. Already the Keystone XL Pipeline has fallen prey to political fighting and several key provisions of the Affordable Care Act have also recently come under fire from the US legal system. With no foreseeable changes in the near term concerning the two parties in DC working together, the best outcome would be that they continue to muddle through without causing any major harm to the US economy.

 

The financial markets will likely remain range bound for the near future, as there seems to be a general lack of a catalyst pushing the markets either higher or lower. Many people point to all of the negatives out there, such as Greece’s slowing growth, but these concerns and nearly all others have been out there for a long time and have failed so far to cause financial mayhem. It seems likely that the market will continue to ignore them in the future. The US financial markets have an innate ability to climb the proverbial wall of worry and they will likely continue to do so in the future. This ability is largely derived from the positive nature of investors who put money into investments, believing in the potential the investment has and the prospects for future growth, while largely ignoring the potential downside. At this point I see nothing that would change my feelings for the market returns I spoke of at the beginning of the year. While the first quarter was a little slower than anticipated I am still looking for solid positive returns in the US markets for 2015, returns in the high single digit or even low double digits.

 

Have a great second quarter of 2015!

 

Peter Johnson

Time for the First Quarter Numbers: The following is a numerical representation of the first quarter of 2015. I will start with the three major US indexes and the VIX, which turned in performance as follows:

 

Index 1st Quarter 2015
VIX -20.36 %
NASDAQ 3.48 %
S&P 500 0.44 %
DJIA -0.26 %

Despite the heightened volatility we saw throughout the quarter the VIX actually managed to decline substantially and at the end of the quarter was in the lower end of the range we have seen for the VIX over the past few years. The risk on trade seemed to permeate the three major indexes as the Dow lost ground, while the S&P 500 gained a little and the NASDAQ turned in a good return for the quarter.

 

Globally, the top three performing indexes for first quarter of 2015 were:

 

Index 1st Quarter 2015
Germany Frankfurt Dax Index 22.03 %
France Paris CAC-40 Index 17.81 %
China Shanghai Se Composite Index 15.87 %

With all of the money the ECB is currently pumping into Europe it was not surprising to see the two strongest countries in Europe benefit the most from the cheap money sloshing around in Europe. Germany and France also happen to be the two largest exporting countries in Europe, which means that goods coming out of the countries are cheaper when bought with dollars since the dollar has strengthened so much against the value of the Euro.

 

Globally, the bottom three performing indexes for first quarter of 2015 were:

 

Index 1st Quarter 2015
Mexico IPC Index 1.34 %
India Bombay Se SENSEX Index 1.67 %
Canada TSX Composite Index 1.85 %

The Dow was the only major global index to post a decline during the first quarter of 2015. Emerging markets in general had a pretty tough quarter, so it was not surprising to see both Mexico and India make the top two spots for lowest performance during the quarter.

For those of you who follow and are interested in the style box performance of various investments throughout the quarter, below is the standard style box performance for first quarter 2015:

 

Style /  Market Cap Value Blend Growth
Large Cap -2.80 % -1.77 % 4.48 %
Mid Cap 1.35 % 4.28 % 6.68 %
Small Cap 1.74 % 3.62 % 6.65 %

The most interesting aspect to the above table is how strong Growth was across all three different market cap spectrums. You can also visually see how being in the wrong sector for the first quarter really would have hurt your relative investment performance, given the wide gap between the Large and Small Cap stocks seen during the quarter.

 

The following table gives the performances for the top-performing sectors for the first quarter of 2015:

Sector Change
Pharmaceuticals 13.88 %
Biotechnology 13.21 %
Healthcare Providers 12.41 %
Home Construction 9.08 %
Aerospace & Defense 7.93 %

The strength of the top three sectors continued from 2014 as these three sectors were some of the top performing sectors throughout last year and the first quarter of 2015.

 

The bottom-performing sectors for the first quarter of 2015 were as follows:

 

Sector Change
Utilities -5.91 %
Transportation -4.54 %
Energy -4.09 %
Financial Services -2.55 %
Natural Resources -2.04 %

Utilities was a little surprising during the first quarter of 2015 as the sector had been a strong performer during 2014 with investors hiding in the sector to try to get steady income through dividends while at the same time taking on less risk historically than most of the other sectors of the markets.

 

Commodities continued to see very volatile trading throughout the first quarter of 2015. Returns were as follows:

 

Commodities Change
GSCI Commodity Index -9.64 %
Silver 5.78 %
Copper -3.30 %
Gold 0.07 %
Oil -10.64 %

As mentioned above, the decline in oil may seem fairly substantial, but relative to the amount it has fallen over the past year, a 10 percent decline is far better that what we had been seeing. With the strength of the US dollar and the uncertainty surrounding many of the other currencies I was expecting to see a better quarter out of gold, but that was not to be the case.

 

 

The fixed income market had a very interesting quarter with yields on various government bonds swinging wildly with seemingly every announcement a Fed official made:

 

Fixed Income Change
20+ Year Treasuries 3.79 %
10-20 Year Treasuries 2.52 %
7-10 Year Treasuries 2.26 %
3-7 Year Treasuries 1.52 %
1-3 Year Treasuries 0.51 %
TIPS 1.41 %

In the end, the quarter turned in positive performance on all of the fixed income investments that are commonly tracked. The real fun will be watching investors playing the fixed income market ahead of the interest rate increase in what will amount to a giant game of musical chairs and hot potato combined. Investors do not really want to be left without a chair or holding the hot potato or, worse yet, both.

For a PDF version of the below commentary please click here Weekly Letter 4-6-2015

Commentary at a glance:

-Major US indexes stayed well within their trading ranges.

-Signs that the labor market may be weakening have started to surface.

-Earnings season for the first quarter of 2015 continues to look dour.

-Greece keeps muddling through its financial situation as cash dwindles.

-Economic data released last week came in weaker than the markets had expected.

 

Market Wrap-Up: Last week the markets were in full holiday mode during most of the week with last week being a shortened trading week due to the Good Friday holiday. A strong rally on Monday quickly faded on Tuesday as the first quarter of 2015 came to a close. The charts below are of the three major US indexes in green with their respective wide trading ranges drawn by the red lines. The VIX (lower right pane below) is drawn with the index in green and the one year average level of the VIX drawn in red:

4 charts 4-6-15

As you can see above all three of the major US indexes (green lines) are solidly in their most recent trading ranges (red lines). We have now seen the markets in the same trading range since early February, despite the seemingly abundant uncertainty in the markets. While the markets have been in their trading ranges, so too has the VIX, which has been bouncing around the 52-week average level for the VIX for the past several weeks. At this point, from a technical standpoint, all three of the major US indexes are tried for both strength and weakness. With the end of the first quarter of 2015 happening last week it was not surprising to see that some of the largest percentage gainers from the quarter were trimmed and a few of the sectors that had been the most beaten down saw strong inflows. As mentioned below in the sector analysis from the previous week, Semiconductors, Healthcare and Pharmaceuticals all fell into the category of investors taking profits last week, while sectors such as Telecommunications as well as Oil & Gas exploration seemed to be attracting investments. Until we see the markets breakout either above or below the current trading range, it looks like we will be stuck range bound in a sideways movement for the near term.

 

National News: With last week containing a holiday it was not surprising to see that the national news was largely unfocused. In fact, the only focus last week seemed to be on the Federal Reserve, as it has been for the past few months. The reason for the focus on the Federal Reserve last week was because some of the employment data they had been hanging their hat on as strong enough to warrant an interest rate hike has now started to show signs of weakness. The chart below shows the past 15 months of data for the Nonfarm public and private payroll figures, which indicate how many people were hired during a given month, both by the government and by the private sector:

Payroll figures 4-6-15

As you can see above, we had been meaningfully above the 200,000 level, which is right in the middle of the chart, even pushing as high as 425,000 new jobs being created during November. Since November, however, the payroll figures have been on a steady decline with both measures falling to approximately 200,000 in January. The figure last week for March pushed both figures below 130,000. According to many economists, the US economy needs to produce at least 200,000 jobs during any given month just to pick up the new entrants into the workforce, so anything under 200,000 does not even put all of the new entrants to the workforce to work. So clearly the work force is not as strong as it was first thought to be and it actually seems to be deteriorating. The reasons for the deterioration are numerous, including everything from the weather on the east coast to the port shutdown in the west coast and the falling oil prices killing jobs in the middle of the country. The labor numbers the Fed is watching to determine when to increase interest rates, however, included many more indicators, things such as labor force participation, all of the unemployment rates including the U6 rate and wage growth. In each and every one of the above mentioned indicators weakness has been shown during the past few weeks with last week being no exception. But labor numbers are not the only numbers the Fed will be watching and the market speculating about for when rates will increase, manufacturing data and the inflation/deflation figures have recently been negative,, both of which will play into the Fed’s decision. Last week seemed to have the labor force figures finally switch over and show what the other indicators had been showing for the past month and, with it, speculation about the Fed keeping rates low through the end of 2015 seems to be coming to the forefront. The other national news last week that pertained to the financial markets had to do with earnings season.

 

With last week being the end of the first quarter of 2015 there was a lot of media coverage about earnings season for the first quarter of 2015 and speculation about how much the weather or the strength of the dollar may impact the quarter for corporations in the US. According to Factset Research, the S&P 500 is now expected to post a year over year decline in earnings of 4.6 percent for the first quarter of 2015. This would be the first year-over-year decline seen on the S&P 500 since late 2012 if it happens. This is a drastic change in expectations from the end of 2014 when the first quarter 2015 earnings expectation was for growth of 4.3 percent. The reason for the decline in earnings expectations is that the Energy sector has been absolutely slashed with the fall of oil and a number of rigs being pulled offline. Numerically, the energy sector expected a decline in earnings of 29.8 percent at the end of 2014 for the first quarter of 2015. Now that number has been revised to a decline of 64.2 percent. All 10 major sectors of the S&P 500 have revised their expectations downward, but energy is by far the worst revision. Also according to Factset, there have been 85 companies that have issued negative guidance about their earnings, while only 16 have issued positive guidance. Both of these figures also show that this could be a rough time for earnings announcements. So what does that mean for the markets in general? It means that a very low bar has been set for earnings season this time around, a bar that many companies will likely easily jump over, which could provide some upside surprises for the markets, but it will be on a stock by stock basis.

 

International News: International news last week had several topics that the global financial markets took notice of. They included the Iranian nuclear deal, continued fighting in Yemen, and Greece continuing to find money to fund itself and stave off default. With the deadline looming on Tuesday evening for the nuclear deal between Iran and the G8, the talks were extended into Wednesday and Thursday. At the end, an agreement was reached in principal. I say “in principal” because the actual deal will not be finished until June. This latest deal was just one step to get to work on the actual deal and hammer out the details. Israel, of course, is very upset about the deal, as are many members of Congress, but it does look like it will go through. The deal has little to do with the financial markets, but if Iran is allowed to keep working on nuclear energy there are fears the country could also be continuing to work on a nuclear bomb, a bomb that would threaten Israel’s very existence and cause a potentially large amount of chaos in an already chaotic region of the world. Yemen continued to make headlines as the fighting between the rebels and the government, which is now backed by several other Arab countries, intensified. This most directly impacts the price of oil as there is starting to be a premium added to oil over the uncertainty surrounding shipping lanes in the Middle East, as mentioned in last week’s commentary. The final international news topic last week had to do with Europe and the situation in Greece. While it does not appear to be getting any worse, it seems it is far from quickly getting better Greece has essentially been out of cash for the past few weeks, but has been sliding by, just barely making loan repayments as well as paying pension and government workers. Greece is trying to make it to June, which is when the next major tranche of funds from the Troika is set to be released. Last week Greece released its latest proposal as to how the current government will fix the situation. In all 67 pages of the document there seemed to be very little that would actually lead to the government either collecting more in revenues or spending less. At this point the odds remain 50/50 as to whether the Greek government manages to pull through the latest financial difficulties without being forced out of the Euro and onto its own currency.

 

Market Statistics:

Index Change Volume
S&P 500 0.29% Average
Dow 0.29% Average
NASDAQ -0.09% Average

 

Last week was a pretty flat week for the three major US indexes as there was little movement either up or down. Volume overall last week was about average once you factor in the lack of Friday trading for the exchanges. Had the markets been trading on Friday we would have likely seen a negative day with the announcement of the labor force data as it came in much worse than expected.

 

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

 

Top 5 Sectors Change Bottom 5 Sectors Change
Telecommunications 3.19% Biotechnology -2.23%
Home Construction 2.95% Healthcare -1.48%
Oil & Gas Exploration 2.47% Pharmaceuticals -1.32%
Natural Resources 1.96% Transportation -1.12%
Regional Banks 1.77% Semiconductors -0.73%

Last week saw something of a flip between the sectors that have been performing poorly over the past few weeks and the sectors that have been performing well. Telecommunications as well as Oil & Gas Exploration, for example, have both been sectors of the markets that have been under pressure, yet last week they were in the top three performing sectors. On the flip side, Biotechnology, Pharmaceuticals and Healthcare made up the bottom three performing sectors of the week after strong performance over the past few months. Much of this has to do with the end of a quarter and money managers and investors alike taking profits on their winners and putting the money to work on the losing positions.

Fixed income had a tame week in relative terms after all of the craziness we have been seeing over the past few weeks. There were no major changes or statements from the Fed to push the market around last week, despite fixed income trading all 5 days last week:

Fixed Income Change
Long (20+ years) -0.25%
Middle (7-10 years) 0.28%
Short (less than 1 year) 0.00%
TIPS 0.33%

With such little movement in the fixed income markets, some investors took to the currency markets last week to try to make some quick money. The US dollar reversed two weeks of declines last week, gaining 0.19 percent against a basket of international currencies. In an interesting trade last week two of the commodity dependant currencies saw drastically different performance. The strongest of the major global currencies last week was the Canadian Dollar as it gained 0.43 percent against the value of the US dollar as oil traded higher for the week. The weakest of the global currencies last week was the Australian Dollar, which declined by 2.09 percent against the value of the US dollar, despite stronger commodity prices, as weakness over future demand from China seemed to be driving the movement.

The rally continued into a third week in a row for most of the commodities last week:

Metals Change Commodities Change
Gold 0.19% Oil 0.55%
Silver -1.23% Livestock 1.00%
Copper 0.98% Grains 1.40%
Agriculture 1.88%

The overall Goldman Sachs Commodity Index turned in a gain of 0.56 percent last week on steady performance of Oil, which rallied for a third week in a row. Metals were mixed last week with Silver giving up 1.23 percent, while Gold was up 0.19 percent and Copper increased 0.98 percent. The soft commodities rebounded last week after declining two weeks ago with all of them increasing by at least 1 percent.

On the international front last week, Russia made a resounding comeback, gaining 12.09 percent as measured by the MSCI Russia Capped Index. Much of the move was due to uncertainty in the Middle East and, if a supply disruption were to happen in the region, the potential benefit to Russian oil as it does not have to move through the Middle East to get to Europe. Australia turned in the worst performance of the week as the Sydney based All Ordinaries Index declined by 0.33 percent.

The VIX settled down just a little last week, in total giving up 2.65 percent in what turned out to be a tame week. At this point the VIX is almost exactly at the average level we have seen over the course of the past 52 weeks. At the current level of 14.67, the VIX is implying a move of 4.23 percent over the course of the next 30 days. As always, the direction of the move is unknown.

For the shortened trading week ending on 4/2/2015, returns in FSI’s hypothetical models* (net of a 1% annual management fee) were as follows:

Last Week Year to Date
Aggressive Model 0.28 % 2.06 %
Aggressive Benchmark 0.54 % 2.24 %
Growth Model 0.29 % 1.26 %
Growth Benchmark 0.43  % 1.79 %
Moderate Model 0.32 % 0.65 %
Moderate Benchmark 0.30 % 1.30 %
Income Model 0.44 % 0.77 %
Income Benchmark 0.16 % 0.70 %

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

 

We made only one change to our models over the course of the previous week and that was to move out of our initial position in Pharmaceuticals, as the sector appears to be starting what could amount to a new break down. We continue to watch all of our positions and look for new investment opportunities, but at the current time we are seeing very little that makes us want to buy and many more things that are pointing us towards caution.

 

Economic News:  Last week was a busy week for economic news releases as the week contained both a month and quarter end as well as a holiday. Overall, economic weakness continued to be shown in the data. There were three releases that significantly missed expectations, highlighted below in red, and one that significantly beat market expectations, highlighted below in green:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Neutral 3/30/2015 Personal Income February 2015 0.40% 0.30%
Neutral 3/30/2015 Personal Spending February 2015 0.10% 0.20%
Neutral 3/30/2015 PCE Prices – Core February 2015 0.10% 0.10%
Slightly Positive 3/30/2015 Pending Home Sales February 2015 3.10% 0.40%
Neutral 3/31/2015 Case-Shiller 20-city Index January 2015 4.60% 4.60%
Negative 3/31/2015 Chicago PMI March 2015 46.3 52
Positive 3/31/2015 Consumer Confidence March 2015 101.3 96.4
Neutral 4/1/2015 ADP Employment Report February 2015 189K 225K
Neutral 4/1/2015 ISM Index March 2015 51.5 52.5
Neutral 4/1/2015 Construction Spending February 2015 -0.10% -0.30%
Neutral 4/2/2015 Initial Claims Previous Week 268K 285K
Neutral 4/2/2015 Continuing Claims Previous Week 2325K 2424K
Negative 4/3/2015 Nonfarm Payrolls March 2015 126K 250K
Negative 4/3/2015 Nonfarm Private Payrolls March 2015 129K 245K
Neutral 4/3/2015 Unemployment Rate March 2015 5.50% 5.50%

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

 

Last week started on Monday with the release of personal income and spending for the month of February, both of which were shown to have increased slightly, but spending increased by less than was anticipated. Core Prices were also released on Monday and indicated that inflation continues to run very low in the overall US economy. The most positive release of the week was the pending home sales figure for the month of February, which showed that pending sales increased by 3.1 percent during the month of February. Much of this has to do with the start of better weather in various regions around the US. On Tuesday a second piece of housing related data was released, that being the Case-Shiller 20 City Home Price index, which indicated that home prices increased by 4.6 percent on a year over year basis on average across the US. While this is slower growth than some of the previous years, it is still solid growth on the asset, which is typically the largest asset an individual owns. The Chicago PMI for the month of March was also released on Tuesday and came in much worse than expected, showing a contraction in manufacturing, while an expansion had been predicted. The decline seen in manufacturing is really starting to be a problem for the US economy’s future growth. Helping to offset the negative manufacturing data on Tuesday was the release of the Consumer Confidence Index as measured by the government for the month of March, which saw the index surprise the market by more than 5 percent to the upside. The reading of 101.3 is the second highest reading we have seen looking back to 2008. However, a consumer that is very confident and not spending any money is less useful to the economy than a consumer who is less confident but still spending money. It is the old adage of putting your money where your mouth is. On Wednesday the first of the employment related figures for the week were released with the ADP employment change report showing that 189,000 jobs had been created during the month. This figure was lower than expected, but not by enough to cause alarm or adjustments to the end of week employment figures set to be released. The ISM index for the month of March was also released on Wednesday and though it came in positive, it came in lower than anticipated. On Thursday the standard weekly unemployment related figures for the previous week were released with both figures coming in better (lower) than expected. On Friday, despite the equity markets being closed for Good Friday, the government released its latest employment figures for the month of March. Overall the unemployment rate in the US was unchanged at 5.5 percent, but the focus of the afterhours trading on the markets was the payroll figures as mentioned and charted above. Both nonfarm public and private payroll figures came in at roughly half of what was expected, further exacerbating the thought that the labor market was going to weaken and play catch-up with the other weakening economic indicators. The Fed surely will have to take note of this latest figure when considering raising interest rates for the first time in many years.

 

After such a busy week last week it is only right to follow it up with a week that has next to nothing as far as economic news releases. The release highlighted below has the potential to move the overall markets on the day it is released:

 

Date Release Release Range Market Expectation
4/6/2015 ISM Services March 2015 56.90
4/8/2015 FOMC Minutes March Meeting
4/9/2015 Initial Claims Previous Week 285K
4/9/2015 Continuing Claims Previous Week 2395K

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

 

This week starts out on Monday with the release of the services side of the ISM, which is expected to show a solid gain for the month of March, but much like the overall ISM index released last week this release could be a little optimistic. On Wednesday the minutes from the FOMC meeting held in March are set to be released. As is typical, the meeting minutes hold very little if any new information, but they do give a little better idea about the discussion that took place at the meeting as it pertains to when and by how much interest rates will start to move. This week wraps up on Thursday with the release of the standard weekly unemployment related figures, both of which are expected to be slightly higher than they were last week. In addition to the scheduled releases there are also a few key Fed officials making speeches throughout the week with the potentially most impactful being on Monday as New York Fed Governor William Dudley makes comments about the current economic situation in the US and how the Fed views the situation.

 

Fun fact of the week—At least Greece was busy back on April 6th 1896

 

On April 6, 1896, the Olympic Games, a long-lost tradition of ancient Greece, are reborn in Athens 1,500 years after being banned by Roman Emperor Theodosius I. At the opening of the Athens Games, King Georgios I of Greece and a crowd of 60,000 spectators welcomed athletes from 13 nations to the international competition.

 

Source: History Channel http://www.history.com

For a PDF version of the below commentary please click here Weekly Letter 3-30-2015

Commentary at a glance:

-The wide trading range for the US markets continued in a roller coaster week last week.

-VIX rebounded sharply off the lowest point seen so far during 2015.

-Will Greece receive cash or not? We are coming down to the line once again.

-Does anyone know where the country of Yemen is located? You are about to find out.

-Economic data released last week came in weaker than the markets had expected.

 

Market Wrap-Up: Just when the world thought the US markets were going to continue to push higher with the NASDAQ making a new all time high, they reversed course and pushed noticeably lower. We have now seen a nearly full retracement back to the low levels we saw within the last two weeks. Meanwhile, the VIX jumped higher. The charts below are of the three major US indexes in green with their respective wide trading ranges drawn by the red lines. The VIX (lower right pane below) is drawn with the index in green and the one year average level of the VIX drawn in red:

4 charts 3-30-15

Last week we saw the sharpest decline in the three major US indexes that we have seen in 2015, with much of the decline occurring over the first three trading days of the week. There did not really seem to be much of a clear reason for the decline other than there were more sellers of stocks than there were buyers, so prices went down until enough buyers were found. All three of the major indexes were hit, but the hardest hit was the NASDAQ, despite it having been the best index of the three from a technical standpoint for the majority of the year so far and going into last week. At this point it is a virtual tie in the technical strength between the three major indexes; none of the three have broken below their most recent support level, as denoted by the red horizontal lines above. The VIX (lower right pane above), however, has crossed back above its 52-week average level as investors seem to be pondering whether there could be more risk in these markets than first thought. We will likely see large swings in the major indexes over the coming weeks as they trade in a very wide trading range. The main reason for the potential large swings in the future is the lack of news and the abundance of rumors, on everything from the markets to oil and even politics. The next major event that could move the markets will be earnings season for the first quarter of 2015, which kicks off in a few weeks when Alcoa announces earnings. But the bar has been lowered to such a level that if corporate American failed to jump over it, it would be seen as a sign of great weakness in the US economy as a whole.

 

National News: National news last week was largely uneventful with the majority of the focus still being on the Federal Reserve and on speculation as to when it will or will not increase interest rates. As mentioned last week, it doesn’t really matter in the grand scheme of things when exactly interest rates start to rise, but the fact that rates will start moving higher. Last week during a speech one Fed official made it sound like earlier was likely, just to be followed up the next day by a second Fed official implying it would be at the end of the year, if at all. This message of confusion has been very carefully crafted by Fed officials and is having the exact type of impact they are going for. If the Fed was fully transparent, the date of the move would already be known and large money managers would be actively adjusting their bond holdings, potentially causing large movements in the prices of select bonds. This uncertainty is actually causing some regularity in the bond market, as awkward as it seems. If the Fed is as data driven as it claims to be, last week it would have pushed out the data of the first hike as weakness permeated through many of the releases, such as durable goods orders and the third estimate of GDP in the US during the fourth quarter of 2015. The other focal points last week were purely political, but nonetheless exciting for the markets.

 

Harry Reid has decided not to run for reelection (even though he would have likely won with some ease in Nevada), making the most powerful Democratic seat on the hill, Minority Leader in the US Senate, up for grabs, with Charles Schumer out of New York looking like a front runner in the race for the seat. The other political development has to do with Iran and the nuclear deal many people have critiqued and the White House still seems to be trying to attain. The talks are scheduled to come to a close this week, with a deal being struck or not. The term “deal” is a little too strong as it is being used by many in the media. If a “deal” is reached, it just allows for further negotiations about the finer, major points, like how to implement what is agreed to and setting timelines for what is agreed to. The heavy lifting in the process has yet to begin and already there have been many cries of foul from various countries around the world, such as Israel who opposes any kind of deal that would allow Iran to get closer to being able to make a nuclear device. The final political stunt pulled last week was the announcement by Ted Cruz that he will be running for President in 2016 as a Republican contender. While very few think he can get the Republican base excited enough to get the vote to be the Republican nominee, it is still interesting that he jumped into the ring first. Up next for getting into the race will likely be Marco Rubio on April 13th as his political machine has rented out some very high priced event space on that day down in Florida. Yet to be heard from is former Florida governor Jeb Bush, who many consider the only viable contender from the Republican field, as well as Hillary Clinton, the clear front runner in the Democratic field who should easily get the nomination if she wants to run and try to become the first female President.

 

International News: Greece continues to be in the headlines as it moves ever closer to a potential cash crunch. So far it has been able to make all of its payments to international creditors, but it is very quickly burning through its cash stock piles. This week Greece has two very large payments due in connection with the end of March, the first being to pay the public workers and the second being to pay the pensioners. While there is speculation that the country will not have enough money to make both payments, I am sure Greece will “find it” somewhere and make both payments in full. Greece seems like it would be scrambling a whole lot more at this point if it truly did not have enough money to make it through the middle of this week. Greece is, however, scrambling a little to ensure it receives funds from international creditors so it can make it to the much larger bailout payments promised in June. The latest is that Greece submitted its new plans to the international lenders as to how it will rectify its spending habits, and while these are better than the first proposal, the plans are still very far from the standards the international community is likely to demand. Greece is really just trying to kick the can down the road and get as much in funding from the international lenders as possible. One aspect of this latest exercise is that the local people in Greece seem to be thinking things may not go without a problem this time around; they have been pulling cash assets out of the Greek banks in mass over the recent weeks. Perhaps they can sense that something will be different this time. As you can see from the chart to the right, created with data pulled from the national Bank of Greece webpage,  Greek deposits 3-30-15this outflow of cash from the Greek banking system has now left the entire system with the lowest amount of cash on hand since prior to the Great Recession back in 2007. Prior to the latest down turn on the chart Greece has almost managed to maintain its cash deposit levels since early 2012. Last week billionaire investor George Soros, who has had his hand in a fair number of currency bets over the years, said he would give the odds 50/50 as to Greece staying on the Euro. This going from life support to life support in the form of bailout cash does have to come to an end at some point. Either Greece will badly misjudge the lending community and be pushed out or the countries lending Greece money may see enough support against supporting Greece that the governments will turn over and become much more nationalistic. Either way, it looks like the outcome is becoming clearer. Now the only question concerns how long the game will continue to be played. We should get some more clarity either this week or next from the European Central Bank (ECB) as to what it has been diligently purchasing with its bond buying program. March was the first month of buying and the ECB is supposed to have purchased 60 billion Euros of debt during the month. It will be interesting to see if it hit the target, went over or fell short of expectations.

 

Outside of Europe last week the focus seemed to once again be on the Middle East. Yemen has become something of a hot bed for political discontent as the sitting President has been forced to flee to a southern port city. Yemen is a country in the Middle East that shares a border with Saudi Arabia and Oman but, more important, has a long sea boarder with both the Gulf of Aden and the Red Sea. Why should the world care about Yemen? Typically, it does not because it has been a relatively stable country in its quasi lawless nature. But now oil is at stake. Not the miniscule amount of oil the country produces and consumes internally, but the oil that moves along its border going through the Gulf of Aden and into the Red Sea, ultimately reaching southern Europe. The current President in Yemen has made sure the oil movements near his country are safe; the new group has all but officially overthrown the sitting president and does not appear to have the same penchant for foreign oil safety. To show just how important Yemen is to the global shipment of oil, Saudi Arabia has already formed a coalition of Arab member states to help try to put down the uprising and has already started to bomb insurgent positions within Yemen. It took these states many months to figure out if and by how much they wanted to help confront ISIS and other terrorist regimes within the region, but only a few short weeks to take action in Yemen. It helps that the Shiite rebels in Yemen are being backed by Iran and that Saudi Arabia is controlled by a Sunni majority, but never the less they are taking action. Oil initially spiked higher on news of the increased fighting in Yemen, but has since settled back down as it looks like Saudi Arabia and others have the situation under control for the time being.

 

Market Statistics:

Index Change Volume
S&P 500 -2.23% Average
Dow -2.29% Above Average
NASDAQ -2.69% Average

 

The three major US indexes declined last week, giving back almost the entire amount gained two weeks ago. At this point it seems like the US markets are in a wide trading range with the chopping becoming faster as time goes on, as indicated in the chart below:

S&P 500 3-30-15 bouncing with trend lines

As you can see, the blue lines indicate the rough movements of the markets, while the green line represents the index movements. They increase and decline to about the same levels over time, but the cycle is becoming faster.

 

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
International Real Estate 0.08% Biotechnology -5.20%
Home Construction -0.11% Semiconductors -5.16%
Oil & Gas Exploration -0.69% Transportation -5.08%
Infrastructure -0.69% Real Estate -3.60%
Consumer Staples -0.69% Regional Banks -3.59%

International real estate was the only major sector of the markets to post gains last week, thanks in part to the uncertainty that has been building in both the equity and the fixed income markets over the past few weeks. Oil and Gas Exploration finally made it into the top 5 sectors as oil pushed higher by nearly 5 percent thanks to fighting in Yemen and uncertainty over how the situation will play out within the country now that the sitting President appears to be on the run. On the down side last week, the high flying Biotechnology and Semiconductors sectors led the way lower despite a large rally on Friday in Semiconductors as rumors were leaked that Intel was looking at purchasing Altera.

Fixed income has been on a very wild ride since the end of January as investors attempt to guess when the Fed will start to increase interest rates. This week the speculation was boosted by all of the Fed officials making speeches on a wide variety of topics:

Fixed Income Change
Long (20+ years) -0.34%
Middle (7-10 years) -0.18%
Short (less than 1 year) 0.00%
TIPS -0.08%

With several Fed officials speaking last week and seemingly giving conflicting information about when rates will start to increase, it seems like 2015 is for sure the year when rates will start to rise, but by how much and when they start to rise is anyone’s guess. The US dollar made it two weeks in a row of declines as it fell 0.62 percent against a basket of international currencies. The strongest of the major global currencies last week was the Swiss Franc for the second week in a row as gained 1.40 percent against the US dollar. The weakest of the major global currencies last week was the Canadian Dollar as it gave up 0.56 percent against the value of the US dollar, despite many of the commodities it normally follows advancing.

Rallying for two weeks in a row, most of the commodities posted gains last week:

Metals Change Commodities Change
Gold 1.31% Oil 4.94%
Silver 1.38% Livestock 1.09%
Copper 0.15% Grains -0.56%
Agriculture -1.02%

The overall Goldman Sachs Commodity Index turned in a gain of 0.92 percent last week on the strong performance of oil, which rallied for the second week in a row. Last week, as mentioned above, the driving force behind the upward movement in oil was uncertainty over the future of Yemen. Yemen is not a meaningful producer of oil by any stretch of the imagination, but it is strategically important because it controls one side of a major physical choke point between the Red Sea and the Gulf of Aden, a major shipping lane for oil moving from the Middle East to Southern Europe. All of the publically traded metals gained in value last week with Silver being the top performer for the second week in a row, gaining 1.38 percent. Its two week total gain is nearly nine percent. Gold increased by 1.31 percent, while Copper barely moved, gaining 0.15 percent. The soft commodities were the weak spot of the week with Grains falling 0.56 percent, while Agriculture overall declined by more than 1 percent.

On the international front last week China saw the best performance of the week for the second week in a row with the Shanghai based Se Composite Index gaining 2.04 percent. Brazil turned in the worst performance as the Sao Paulo based Se BOVESPA index declined by 3.60 percent as uncertainty both on the political front as well as uncertainty over major upcoming sporting events seems to have called into question many aspects of investing in the country.

With the three major US indexes trading in a wide trading range it is not surprising to see the VIX also trading in a trading range, albeit a smaller range than I would have expected given what has been going on in the markets. No sooner had the VIX hit the lowest level we have seen so far during 2015 than it turned around and jumped higher; last week it gained 15.75 percent. At the current level of 15.07 the VIX is implying a move of 4.35 percent over the course of the next 30 days. As always the direction of the move is unknown and we may change direction numerous times during the next 30 days if they are anything like these past 30 days have been.

For the trading week ending on 3/27/2015, returns in FSI’s hypothetical models* (net of a 1% annual management fee) were as follows:

Last Week Year to Date
Aggressive Model -1.28 % 1.77 %
Aggressive Benchmark -1.46 % 1.69 %
Growth Model -0.91 % 0.97 %
Growth Benchmark -1.14  % 1.36 %
Moderate Model -0.55 % 0.33 %
Moderate Benchmark -0.81 % 1.00 %
Income Model -0.39 % 0.32 %
Income Benchmark -0.40 % 0.54 %

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

 

We made no changes to our models over the course of the previous week. We remain in several partial positions that we would like to fill, but think there may be a better opportunity to do so in the near future. The sectors that were the strongest going into the week last week all came out very near the top of the list at the end of the week, so despite the large move in the markets it seems like it had little impact on any single area of investments.

 

Economic News:  Last week was an average week for economic news releases, but what was released by and large was not positive. There were two releases that significantly missed expectations, highlighted below in red, and none that significantly beat market expectations:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Neutral 3/23/2015 Existing Home Sales February 2015 4.88M 4.90M
Neutral 3/24/2015 CPI February 2015 0.20% 0.20%
Neutral 3/24/2015 Core CPI February 2015 0.20% 0.10%
Slightly Positive 3/24/2015 New Home Sales February 2015 539K 470K
Negative 3/25/2015 Durable Orders February 2015 -1.40% 0.50%
Negative 3/25/2015 Durable Goods -ex transportation February 2015 -0.40% 0.30%
Neutral 3/26/2015 Initial Claims Previous Week 282K 293K
Neutral 3/26/2015 Continuing Claims Previous Week 2416K 2425K
Slightly Negative 3/27/2015 GDP – Third Estimate Q4 2014 2.20% 2.40%
Slightly Positive 3/27/2015 University of Michigan Consumer Sentiment March 2015 93.0 92.0

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

 

The week started on Monday with the release of existing homes sales figures for the month of February, which came in almost exactly as estimated, pushing the home builders higher for the day. On Tuesday the Consumer Price Index (CPI) was released with two tenths of a percent increase being shown, far below what the Fed would like to see. New home sales were also released and better than expected, but the market hardly took notice as they were too busy pushing lower. On Wednesday the negative releases of the week were released with overall durable goods orders being shown to have declined by 1.4 percent, while orders excluding transportation fell by 0.4 percent compared to expectations that both figures would show a small increase during the month. These two figures were very concerning as they show a significant amount of weakness in a major part of the overall US economy. The poor durable goods orders numbers were part of what sent the market down a significant amount on Wednesday. On Thursday the standard weekly unemployment related figures both showed slightly better than expected figures, but not enough for the markets to really take notice. On Friday the third estimate of GDP for the fourth quarter of 2014 was released and the number was revised down to 2.2 percent from the second estimate of 2.4 percent. While this was negative on the surface the market actually reacted positively to the announcement as it seemed to push the date of the Fed raising rates further out. Wrapping up the week on Friday last week was the release of the University of Michigan’s Consumer Sentiment Index for the month of March (final estimate) and it came in slightly above market expectations, now if only confident consumers would start spending money everything would be set for a better recovery in the US economy.

 

This week is a very heavy week for economic news releases with the releases spread out over the full trading week despite Friday being a market holiday. The releases highlighted below have the potential to move the overall markets on the day they are released:

 

Date Release Release Range Market Expectation
3/30/2015 Personal Income February 2015 0.30%
3/30/2015 Personal Spending February 2015 0.20%
3/30/2015 PCE Prices – Core February 2015 0.10%
3/30/2015 Pending Home Sales February 2015 0.40%
3/31/2015 Case-Shiller 20-city Index January 2015 4.60%
3/31/2015 Chicago PMI March 2015 52
3/31/2015 Consumer Confidence March 2015 96.4
4/1/2015 ADP Employment Report February 2015 225K
4/1/2015 ISM Index March 2015 52.5
4/1/2015 Construction Spending February 2015 -0.30%
4/2/2015 Initial Claims Previous Week 285K
4/2/2015 Continuing Claims Previous Week 2424K
4/3/2015 Nonfarm Payrolls March 2015 250K
4/3/2015 Nonfarm Private Payrolls March 2015 245K
4/3/2015 Unemployment Rate March 2015 5.50%

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

 

This week kicks off on Monday with the release of personal income and spending for the month of February, which are both expected to show slight increases over the January level. Personal Consumption Expenditures (PCE) prices are also set to be released on Monday with a tenth of a percent increase expected, not nearly enough for the Fed to be comfortable. On Tuesday the Case-Shiller 20-City Home price index for the month of January is expected to show an annual gain of 4.6 percent on average. While slower than it has been in recent years, a nearly 5 percent gain on what is most people’s largest asset is a positive thing for the US economy. Likely overshadowing the housing data on Tuesday will be the release of the Chicago PMI and the Consumer Confidence Index as measured by the government. The Chicago PMI is expected to be perilously close to the inflection point of 50 so a reading below would be very negative, while a reading meaningfully above 52 could be seen as positive. Consumer confidence is expected to show no change over the February level and should not have an impact on the overall markets unless it really misses expectations. On Wednesday the first of the employment related reports of the week is set to be released with the ADP employment change figure for the month of March. Overall, the US economy is expected to have added 225,000 jobs during the month. This is a middle of the road figure; something up around 300,000 would be very positive for the economy, while a figure under 200,000 would be seen as very bad. The ISM Index will likely overshadow the other releases on Wednesday as it, much like the Chicago PMI, is expected to be very close to the inflection point of 50. Thursday will likely be a calm-before-the-storm day for economic news releases as only the standard weekly unemployment related figures are set to be released. Friday will be a bit odd as the government is open and releasing several key pieces of economic data, but the markets are closed in observance of Good Friday. The unemployment rate will likely garner the most headlines, but there is an expectation of no change from the 5.5 percent we saw back in February. As is normally the case, the nonfarm public and private payroll figures are likely to show more of what is going on behind the scenes along with the participation rate and the U6 unemployment rate. The markets, however, will have all weekend to digest whatever the announcements hold so the impact should be somewhat muted when we all get back to work on Monday, the 6th of April.

 

Fun fact of the week—Does Spring feel like it gets shorter every year? It does!

 

Each year, according to astronomers, summer in the northern Hemisphere grows longer at the expense of a shortening spring. This happens because the Earth wobbles (called precession) on its axis as it orbits the sun, taking a chunk out of spring in the process. In total, spring will be shortened by four days over approximately 6,500 years. For a video demonstration of this process please see the following link http://www.weather.com/science/news/spring-shorter-vernal-equinox-season

 

Source: The Weather Channel, http://www.weather.com

For a PDF version of the below commentary please click here Weekly Letter 3-23-2015

 

Commentary at a glance:

-US markets rallied on the heels of the Fed statement.

-June, September or 2016: who cares when rates start to increase?

-Greece is once again making headlines as the country needs cash—fast!

-We continued to adjust our models for the given market environment.

-Economic data released last week came in much weaker than the markets had expected.

 

Market Wrap-Up: It looks like yet another “downturn” in the markets has been corrected as the markets last week followed through on a rally that started two weeks ago. The rally came on the heels of the Federal Reserve announcement in which Chair Yellen lost her patience with the word “patience” as to when interest rates will be increased. The charts below are of the three major US indexes in green with their respective wide trading ranges drawn by the red lines. The VIX (lower right pane below) is drawn with the index in green and the one year average level of the VIX drawn with the red line:

4 charts 3-23-15

 

With the turnaround under way, the NASDAQ pushed higher at a faster rate than the other two major US indexes. It easily remains the most technically strong of the three major indexes, with the biggest driver of the index seemingly being its all time high level, which is now easily within reach. It has been a little over 15 years since the NASDAQ hit its all time high level (back in early 2000), and it now looks like it will make it to a new high early this week, barring something really changing the direction of the NASDAQ. While the NASDAQ is looking strong, the S&P 500 and Dow are significantly weaker, from a technical standpoint. The S&P 500 is a little stronger than the Dow, but it is a pretty tight race between second and third place. The next major points of resistance for the S&P 500 and the Dow will be the high points from the very first few trading days of March. If the indexes push through these levels, they could be setting up for a longer term run higher despite some of the uncertainties that seem to remain lurking in the shadows of the financial markets. One aspect of last week’s move that was encouraging is that volume picked up a bit, compared to the move down, which occurred over the previous 2 weeks. This seems to indicate that there was more participation in the markets on the way up than down; this sentiment is also echoed by the movement on the VIX. The VIX moved lower and is currently sitting near the lowest point we have seen so far during 2015. This level, however, is a little more than 20 percent above the low points we reached during 2014. Why all of the positive movement in the markets last week? It all had to do with just one thing: the policy statement from the Federal Reserve that was released on Wednesday afternoon.

 

National News: Heading into last week there was rampant speculation about a single word that could be absent from the FOMC statement released on Wednesday; that word was “patience.” Would Chair Yellen leave it in the statement, signaling that we were a few months or more away from the initial rise in interest rates, or would she remove it, signaling that rates would likely rise at the June meeting? True to her form and the form of past Federal Reserve chairs, Chair Yellen did remove the word “patience,” while at the same time adding the word “impatient” to the statement. Previously she has said that removing the word does not mean that a rate hike was imminent, but the market seemed to run with its removal as indicating that rates would go up in June. In order to dampen the effect of this, she added that while “patience” had been removed, the Fed was not getting impatient and would still be data dependant on when to raise rates. What data is the Fed looking at and how will the data be interpreted? These are the million dollar questions. The Fed has outlined the indicators being considered several times, but knowing what key levels and trends the Fed is looking for is the realm of speculation. The strength of the US dollar was mentioned in Chair Yellen’s statement and her mention of it caused a massive sell off in the US dollar, triggering one of the largest intraday moves we have seen on the dollar in a number of years.

 

The labor market is one of the dual mandates of the Fed and is weighing heavily on the decision concerning when to increase rates. The official unemployment rate in the US has been steadily coming down and has actually moved under the initial target level set by Chairman Bernanke at the end of his term. But the official unemployment rate only tells part of the story. The U6 unemployment rate is worse, with the latest figure being 11.0 percent. The labor force participation rate has also been coming down and, potentially the most important, wage inflation is still not picking up. Typically, wages increase and, with the increase, more and more people look for and find jobs. However, this time around wages have not gone up. In fact, wages have pushed lower, making it very hard to decipher which signals are true and which may not be correct about the labor market. The second aspect to the Fed’s dual mandate is price stability and this too is causing the Fed a little pause. Prices in the US have been rising, but they have been rising at a very slow pace. Typically, the Fed would like to see inflation running at about 2 percent annually. The US economy, however, has been running an inflation rate under 2 percent since 2012 and the first print according to the Bureau of Labor and Statistics was that prices actually declined by one tenth of a percent during January of this year (this is the latest data point). Much of the decline in price inflation has been due to the drop in energy costs as it seems almost everything else is increasing in cost. The conundrum the Fed faces is that if the Fed wants to increase prices it would typically cut rates, but we are at the lower bound of interest rates already. If prices were running away to the up side (i.e. inflation was running away), the Fed would raise rates to help combat this; but this is just not the case right now. In the end, with the Fed being data dependent, it looks like September is the most likely meeting at which the Fed will start to raise interest rates and the rates will likely move by 0.25 percent. The bottom line is that rates will rise; they have to so the Fed has the ability to act rationally should economic hardship once again come upon the US economy. With its back against the wall with the rate being down at zero, the Fed would have to immediately jump to unusual measures to help the economy if things were to turn bad for the economy. Getting rates moving upward to something at or above 1 percent is very positive, providing the Fed with the space and ability to act should it need to in the future.

 

Earnings season officially wrapped up for the fourth quarter of 2014 last week. Below is the final table for the fourth quarter of 2014 of the better known companies that released earnings last week with earnings that missed expectations highlighted in red, while earnings that beat expectations by more than 10 percent are highlighted in green:

 

Adobe Systems 0% General Mills 4% Oracle 2%
Darden Restaurants 18% GUESS 9% Shoe Carnival 67%
DSW 30% KB Home 250% Tiffany & Co 1%
FedEx 7% Nike 6% Williams-Sonoma 1%

 

Retailers were under the spotlight last week as their earnings were trickling in. Shoes had a great quarter, evidenced by both DSW and Shoe Carnival easily beating market expectations. KB Home, one of the largest home builders in the US, released great earnings last week, although the future is less certain thanks to the prospects of higher interest rates at the end of the year. Darden also made a few headlines as the restaurant chain operator seems to have finally started to turn around Olive Garden across the US.

 

International News: Will Greece receive the money? Will Greece be able to pay its bills today, tomorrow, next week, next month? These are all questions investors and economists alike have been asking about Greece over the past few years. These questions persisted through four different governments in Greece, each one vowing to change what the previous government did before them and each one failing miserably. Last week Greece found about 2 billion Euros at the end of the week to make loan payments rather than default. This week the heads of Greece are in various places in Europe pleading their cases for more bailout funds. Europe is beginning to tire of these shenanigans as the proposals Greece has put forward under the current government have been full of holes and appear to have been written up by amateur economists. How are the financial markets taking all of this? The financial markets have largely been ignoring what Greece has been up to. One can only cry wolf so many times before the cry falls on deaf ears. So with the odds of Greece leaving the Euro and Euro zone increasing (in some cases having recently moved over 50 percent), according to a lot of financial people, the markets seem to be taking a whole different approach to thinking about such an action. Pertaining to the strength of the Euro, if the weakest member of the Euro were to leave, that would inherently increase the value of the Euro. The thought and fear of contagion seems to be lessening as the rest of Europe could easily help the other weak members, Italy and Spain, if Greece no longer had to be supported by Europe. It will be touch and go between Greece and the rest of Europe over the next few weeks and it seems the markets will start to take more notice as Greece’s cash stock pile dwindles. While Europe is still working through the situation in Greece, other developments were being made in Asia.

 

Asia has largely stayed out of the news recently as Russia, Ukraine and Europe seemed to garner the most headlines. However, last week Asia made a few headlines with the Asian Infrastructure Investment Bank (AIIB) getting some major international support. The AIIB is a large multinational bank that will likely rival the World Bank and the IMF in the future and is run by and largely funded by China. The US has long been against the AIIB gaining support, but last week France, Germany and Italy all signed up to be a part of the bank, following the UK joining two weeks ago. Many people view the move by the Europeans to back the bank as a major snub to the US, but it makes sense for Europe to try to align with Asia as that is the region of the world that will likely experience the most growth over the coming decades as their economies far surpass the size and impact of the US. Why is the US not supporting the AIIB? It would remove some of the power of the World Bank, which is nearly fully funded by the US and almost always takes actions that help the US agenda. As China and Asia come to economic power, there will likely be more little spats between Asia and the US. The collateral damages in partnerships and agreements between countries could really start to mount, leading us into a very uncertain time for the global economy.

 

Market Statistics:

Index Change Volume
NASDAQ 3.17% Above Average
S&P 500 2.66% Way Above Average
Dow 2.13% Way Above Average

 

With the Fed replacing the word “patience” with the words “not being impatient,” the US financial markets took this as a positive sign that rates are more likely to start moving up in September, rather than June. With prevailing thoughts of rates staying low a little longer, the “risk on trade” was under way with investors rushing toward technology related names and pushing the NASDAQ to being the best performing index of the week. Volume was high last week, but that could have had more to do with the quadruple witching falling on last Friday than anything else.

 

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 6.14% Basic Materials -0.45%
Residential Real Estate 6.10% Broker Dealers 0.93%
Infrastructure 4.81% Financial Services 1.11%
Utilities 4.66% Insurance 1.86%
Healthcare 4.57% Technology 2.09%

Biotechnology was the top performing sector of the markets last week, a spot it has grown accustomed to over the past few months. Other areas of the market that saw strength were all related to the Fed statement on interest rates most likely not increasing until September and included sectors such as Utilities and Real Estate. Infrastructure was an interesting sector last week as it was one of the top performing sectors; this is a rare occurrence. Most likely, Infrastructure was up because of the news about the Asian Infrastructure Bank being set up by China. On the flip side, Materials continues to struggle as it was the sole sector that moved lower during the course of the week as global demand remains uncertain.

Fixed income has been on a very wild ride since the end of January as investors attempt to guess when the Fed will start to increase interest rates. After last week’s announcement it looks like September is the odds on favorite for the first increase:

Fixed Income Change
Long (20+ years) 3.78%
Middle (7-10 years) 1.64%
Short (less than 1 year) -0.01%
TIPS 2.02%

With the implication that rates are unlikely to start to increase in June, the US fixed income market saw a continuation of the upward move that started two weeks ago. The US dollar reversed course last week and pushed lower after touching multiple year highs against a few currencies two weeks ago. There is a lot of speculation about why the dollar moved lower last week, but one of the strongest thoughts is that with options expiring on Friday last week, some people had to “sell” to close their position to book such large gains. Whatever the reason, the US dollar did not have a good week last week, falling 2.53 percent against a basket of international currencies. The strongest of the major global currencies last week was the Swiss Franc as it gained 3.05 percent against the US dollar. The weakest of the major global currencies last week was the Japanese Yen as it gained only 1.15 percent against the value of the US dollar as weakness looks like it will continue for the island country. Last week was the first pull back we have seen on the US dollar in a long time, so we will have to watch closely to see if this is the start of a trend or if it was just an isolated event.

It was finally time for commodities to move higher after being significantly beaten down over the course of the past few months. It has been very rare for us to see all of the commodities listed below gain during any single week:

Metals Change Commodities Change
Gold 2.43% Oil 3.86%
Silver 7.38% Livestock 1.80%
Copper 3.25% Grains 2.08%
Agriculture 2.17%

The overall Goldman Sachs Commodity Index turned in a gain of 0.98 percent last week as it bounced off the lowest point we have seen so far during 2015. Oil continued its very unusual and wild ride last week after falling nearly 10 percent two weeks ago. It was the bull’s turn last week, pushing the black gold higher by almost four percent.  All of the publically traded metals gained in value last week with Silver being the top performer, gaining more than seven percent, while the more industrially used Copper advanced 3.25 percent and Gold brought up the rear, gaining only 2.43 percent. The soft commodities also had a good week last week gaining across the board, with Agriculture in general gaining more than two percent. Much of the moves in the commodities last week probably had more to do with the decline in the US dollar than anything else, but it is still nice to see some of them increase from the abnormally low levels they have been trading near for the past month.

On the international front last week China saw the best performance of the week with the Shanghai based Se Composite Index gaining 7.25 percent. India turned in the worst performance of the week last week, being the only major global index to post a decline. The Bombay based Se SENSEX index declined by 0.85 percent over the course of the week. Overall, the Indian stock market has been performing very well since Narendra Modi took over as Prime Minster for the country back in May of 2014.

After being up for the previous two weeks in a row it only seems right that the VIX gave back all of its increase in just one short week last week. Last week the VIX closed almost exactly at the lowest level we have seen so far this year, tumbling down by almost 20 percent. During the month of March we have now seen the VIX fall from nearly 17 all of the way down to 13; this means the markets do not seem worried about the unknowns of the markets: the situation in Europe, the potential move in rates by the Fed or anything else that most economists point to as uncertainty on the horizon. The VIX is telling investors that everything will be fine and that it will be relatively smooth sailing from here. I am not sure I fully believe the VIX at this low of a level given what is going on, but the VIX is what it is. At the current level of 13.02 the VIX is implying a move of 3.76 percent over the course of the next 30 days. As always, the direction of the move is unknown.

For the trading week ending on 3/20/2015, returns in FSI’s hypothetical models* (net of a 1% annual management fee) were as follows:

Last Week Year to Date
Aggressive Model 2.57 % 3.05 %
Aggressive Benchmark 2.86 % 3.20 %
Growth Model 1.93 % 1.88 %
Growth Benchmark 2.22  % 2.52 %
Moderate Model 1.31 % 0.87 %
Moderate Benchmark 1.59 % 1.82 %
Income Model 1.14 % 0.71 %
Income Benchmark 0.79 % 0.95 %

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

 

We made a few changes to our models over the course of the previous week. The major changes were that we put some of the cash we had been holding to work. We purchased an additional step into our healthcare position, in addition to adding a first step into the pharmaceuticals sector. We also added to our position in the US dollar as we continue to think this position will pay very well as the uncertainty surrounding Europe will likely only grow and the US remains well ahead of the majority of the world in its monetary actions; we are about to increase rates whereas nearly everyone else is still in easing mode. While we still have some cash on the sidelines, we are participating in a large percentage of the market upside over the course of the previous week and continue to look for investment opportunities.

 

Economic News:  Last week was a slow week for economic news releases, but for the second week in a row nearly everything that came out was negative. There were two releases that significantly missed expectations, highlighted below in red, and none that significantly beat market expectations:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Negative 3/16/2015 Empire Manufacturing March 2014 6.9 8.8
Slightly Negative 3/16/2015 NAHB Housing Market Index March 2014 53 56
Neutral 3/17/2015 Building Permits February 2014 1092K 1070K
Slightly Negative 3/17/2015 Housing Starts February 2014 897K 1041K
Neutral 3/19/2015 Initial Claims Previous Week 291K 293K
Neutral 3/19/2015 Continuing Claims Previous Week 2417K 2415K
Negative 3/19/2015 Philadelphia Fed March 2014 5 6.9

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

 

Last week started out on Monday with the release of a poor reading from the Empire Manufacturing Index, which slowed down during the month of March. While manufacturing still expanded during the month it did so at a slower rate than was expected. This was the third month in a row of steady declines in the index, starting what looks to be a troubling trend. Also released on Monday was the NAHB Housing Market Index, which came in at 53, while the market had been expecting 56. The index rates the relative level of current single home sales with a 50 reading being the middle of the road. Anything above 50 is a positive outlook, while anything below 50 is a negative outlook. So while a reading of 53 is positive, it is less positive than it was during February. On Tuesday building permits came in better than expected, while housing starts missed expectations due to poor weather in the north east. On Thursday both standard weekly unemployment related figures came in very close to market expectations and were therefore non market moving events. The week wrapped up on Thursday with a negative reading on the Philadelphia Fed Index as the print came in at 5.0, while the market had been expecting 6.9. Much like the Empire index earlier during the week, manufacturing was growing in the greater Philly area, but doing so at a slower rate than during February. Unlike the Empire index, the Philly index has now been slowing down for five months in a row. With a slowdown in manufacturing being seen in several different regions, the US economy appears to be not quite as strong as many economists would have liked given the economic recovery we have seen over the past few years. This also leaves the Fed in an even more precarious position as raising rates may hurt the economy if we are not growing above the stall speed for the economy.

 

This week is an average week for economic news releases with the releases spread out over the full trading week. The releases highlighted below have the potential to move the overall markets on the day they are released:

 

Date Release Release Range Market Expectation
3/23/2015 Existing Home Sales February 2015 4.90M
3/24/2015 CPI February 2015 0.20%
3/24/2015 Core CPI February 2015 0.10%
3/24/2015 New Home Sales February 2015 470K
3/25/2015 Durable Orders February 2015 0.50%
3/25/2015 Durable Goods -ex transportation February 2015 0.30%
3/26/2015 Initial Claims Previous Week 293K
3/26/2015 Continuing Claims Previous Week 2425K
3/27/2015 GDP – Third Estimate Q4 2014 2.40%
3/27/2015 University of Michigan Consumer Sentiment March 2015 92.0

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

 

This week starts off on Monday with the release of the existing homes sales figure for the month of February; expectations for this release are pretty high with the expected number being close to 5 million units. One has to wonder if the same bad weather that hurt some of the housing numbers last week will have an adverse effect on existing home sales as well. On Tuesday the Consumer Price Index (CPI) is set to be released and this will be an unusually important release as the Fed will likely be watching very closely and the figure may play into when the Fed starts to increase interest rates. The higher this number is the sooner the Fed will likely raise interest rates if everything else was equal. Also released on Tuesday is the new Home Sales figure for the month of February. This release, like the existing home sales figure, is at risk of being lower than expected due to weather. On Wednesday one of the very important releases of the week is set to be released with the durable goods orders for the month of February being reported. Expectations are for overall orders growth of 0.5 percent, while orders excluding transportation are expected to increase by 0.3 percent. Both of these numbers seem a little high given the negative tint we have been seeing recently in order economic news releases. If these two numbers come in negative it would be a bad sign for the US economy, but this in turn may lead to the markets moving higher as it would likely make the markets think the Fed will raise rates later during the year. On Thursday the standard weekly employment related figures are set to be released with expectations of both figures being slightly higher than they were last week. On Friday the key release of the week is set to be released, that being the third and final estimate of fourth quarter GDP in the US as measured by the US government. After a large downward revision for the second estimate of this figure, the market is expecting this release to claw back some of what was given up with the last revision, with overall GDP for the fourth quarter to be increased from 2.2 percent up to 2.4 percent. If this figure misses it will likely lead to increased market volatility, but there is no certainty in the direction the market would move. Much like the durable goods orders and the CPI numbers, bad news seems to be taken as positive by these markets, while good news may have the opposite impact. Wrapping up the week this week is the University of Michigan’s Consumer Sentiment Index, which is expected to show little change over the mid-month reading just two weeks ago. If we see a large drop off in this figure it would be negative, but that is highly unlikely. Overall, the scheduled economic news releases are likely to be overshadowed this week by what happens in Greece with the international lenders as the country struggles to find the money to pay its bills.

 

Fun fact of the week—How many times has the Fed increased interest rates?

 

With all of this talk about an interest rate hike I decided to pull the data and look at how many times the Federal Reserve has increased interest rates.

 

Since 1971 there have been 134 individual interest rate increases in the Fed Funds rate with the largest single day move being a 2.5 percent increase in late October of 1979, pushing rates up to 15 ½ percent.

 

Data Source: Federal Reserve Bank of New York http://www.Newyorkfed.org

 

For a PDF version of the below commentary please click here Weekly Letter 3-16-2015

Commentary at a glance:

-US markets continued lower on Fed speculation.

-The US dollar continues to strengthen.

-Russian President Putin missing for 10 days?

-We adjusted several positions in our models to take advantage of the current market environment.

-Economic data released last week came in much weaker than the markets expected.

 

Market Wrap-Up: With the markets having sustained a bit of a down trend over the past few weeks I have redrawn the key levels on two of the three charts. I had to move away from the trading channels on both the S&P 500 and the Dow since they both broke these levels, and by such a large amount. The charts below are of the three major US indexes in green with their respective key levels drawn by the red lines. The VIX (lower right pane below) is drawn with the index in green and the one year average level of the VIX drawn with the red line:

4 charts 3-16-15

On the S&P 500 chart (upper left pane above) I have drawn two key support levels; both of these are based on previous support levels. The first support level is relatively close to current levels, only about 0.65 percent below the closing price on Friday. The second red line that is much lower than the current level is an area the market has tested before back in January—the psychological 2,000 level on the index. This level is about 2.6 percent below the current level of the index. I redrew the red lines on the Dow (upper right pane) above as well and, much like the S&P 500, the levels are just below current levels, about 2 percent below current levels, and then a red line at the bottom of the chart is the 17,000 level, a third significant level of support should the markets really start to move lower. While I was outlining the downside for both the S&P 500 and the Dow I noticed the NASDAQ (lower left pane above) has once again moved into a trading channel that is actually the inverse of the old trading channel from before. If you look at the chart, the two red lines crossed over each other back in early March, thus the support and resistance levels of the past trading channel flipped. The upper red line currently is now a resistance level, while the lower red line is a support level. In less than a month we have already seen both levels be tested as the index is now moving in the middle of the new trading range. From a technical standpoint, the NASDAQ remains the strongest of the three major indexes, while the S&P 500 and the Dow are equally weak. The weakness of the indexes, however, did not translate into a big jump in the VIX last week or really over the recent downward trend as it seems the larger institutional investors are not actively adjusting their portfolios. These larger institutions are the managers who typically use options in large numbers and options are what drive the level of the VIX, so it seems the recent moves in the markets have been smaller investors adjusting positions rather than institutional investors. At this point it looks like the markets will be perfectly content just banging around on the news of the day as investors try to time the first Fed rate hike and attempt to be just barely in front of the announcement.

 

National News: Last week the national news focused on two main topics: the standby “when will the fed raise interest rates?” and the strength of the US dollar. With the latest economic news releases seeming to show that there is a little more weakness in the data than the Fed probably would like, in things such as retail sales and consumer sentiment, these fears are being offset by the falling prices being seen at both the consumer and producer levels as well as the currently healthy jobs market in the US. With such large factors in the health of the US economy seemingly opposed to each other it makes the Fed’s dual mandate very hard to implement as the “price stability” piece would say raise rates, while the “full employment” piece seems to be saying that it may be a little early. The Fed will likely increase rates this year and, in doing so, will start what is likely to be a long term trend toward interest rate normalization. The bets as to when the first of the rate hikes will occur are still very split with the  odds of June and odds of September being roughly split. We are starting to see adjustments in the market to a rising rate environment and have actively started to adjust our positioning for the event; last week we sold one of our utility holdings that seemed to be the most at risk to rising interest rates. While speculation was going on about the Fed, speculation was also running rampant about the US dollar.

 

The US dollar has been doing very little other than moving higher over the past few months as international investors seem to be fleeing their local currencies in favor of holding dollars. The chart below depicts the movements of the US dollar against a basket of international currencies going all of the way back to 2007:

Dollar bull 3-16-15

As you can clearly see, the Dollar has been moving in a near vertical fashion so far during 2015 and has been on a very steep trajectory since the middle of 2014. So the big question becomes: can this movement continue? I think the dollar still has some room to move higher for several reasons; the first being the US economy. Yes, it may not be as strong as many investors would like it to be, but it is a lot better than most of the rest of the world. Europe is just now starting to take drastic means to try to save its economy. These measures will take years to implement and may not work. Japan is still trying to fix its economy and has been doing so for the better part of the last 30 years. China, while still the largest buyer of US debt, has enough of its own internal problems to fix that it cannot focus much of its attention on the value of the Yuan. Other commodity rich countries like Australia, Canada and Brazil have all see their currencies fall as commodity prices have plummeted and this looks to be a longer term trend, not a short term blip at this point. Finally, the Swiss Franc fell from its status as a “safe haven” currency just a few short months ago when the Swiss removed the peg, to the detriment of many traders and hedge funds that were counting on that peg staying in place and leveraging the trades accordingly. So where else can people or corporations realistically put earnings so they do not see their buying power eroded over time? The US dollar really is a sort of best house in Detroit scenario, as there are few other viable options.

 

Earnings season is almost officially finished for the fourth quarter of 2014, but that does not stop the stragglers from continuing to trickle in. Being so close to the end of earnings season for the fourth quarter of 2014, the table of companies that released earnings has continually shrunk week to week. Below is a table of the better known companies that released earnings last week with earnings that missed expectations highlighted in red, while earnings that beat expectations by more than 10 percent are highlighted in green:

 

Barnes & Noble -22% Krispy Kreme 0% Ulta Salon 7%
Buckle 1% Men’s Wearhouse 57% Urban Outfitters 5%
Dollar General 0% Revlon 0% Vail Resorts 35%
El Pollo Loco 0% Rosetta Stone -6% Williams-Sonoma pushed
Express 7% Shake Shack 67% Zoe’s Kitchen 0%
Kirkland’s 0% Stein Mart 0% Zumiez 0%

 

An interesting aspect to the companies and figures listed above is that there are a large number of them that show zero, meaning they hit market expectations exactly with their announcements. These companies are reporting very late so there are numerous comparable stores and companies that have already released their earnings, so perhaps the analysts really have fine tuned their expectations, but this still seems like an odd phenomenon. One local company had a good fourth quarter earnings season and that was Vail Resorts, but it looks like the first quarter of 2015 may be a little more difficult for them given the lack of snow for much of the quarter. Shake Shack made headlines last week as the company beat market expectations on earnings, but issued not so good of an outlook, which led to its stock being hit during afterhours trading.

 

There have now been 498 companies out of the S&P 500 that have released their earnings and the earnings expectations beat and miss numbers have not changed since last week. 75 percent of companies beat earnings per share expectations during the fourth quarter of 2014, while 25 percent missed. When looking at revenues, 58 percent of companies beat expectations while 42 percent missed expectations. These numbers are setting up for a very interesting first quarter earnings season, as companies had to deal with not only poor weather across much of the east coast, but also a general slowdown in spending and manufacturing that we have been seeing over the past few months in the economic news releases.

 

This week we are down to only 12 companies releasing earnings that the majority of people would recognize. Below is a table of the better known companies that will release their earnings this week, with the releases that have the most potential to impact the markets highlighted in green:

 

Adobe Systems General Mills Oracle
Darden Restaurants GUESS Shoe Carnival
DSW KB Home Tiffany & Co
FedEx Nike Williams-Sonoma

 

Retail remains one of the most represented areas of the markets that is still releasing earnings and this week is no exception with the markets likely to watch the earnings of Nike, General Mills, and Tiffany & Co very closely. The market is watching these last few retailers’ earnings very closely because we have seen an overall decline in consumer spending over the past few months and the market is looking for this to translate into retailers’ bottom lines. So far, the decline in spending has not hit since the earnings being released ended in December of 2014, but anything in the forward guidance that would signal weakness will be closely scrutinized at this point by the market. FedEx is also releasing earnings this week and is a company that is always closely watched. Given the large amount of packages it touches, FedEx is able to get a good feel for the overall health of the US economy, or at least of small businesses, based the amount of packages that were shipped during the quarter.

 

International News: International news last week was pretty uneventful, other than some large speculations about the well being of Russian President Putin. Toward the middle of last week it was announced that the Kremlin had canceled a trip for the President as well as a number of meetings. The Kremlin then published old photos of the President working, saying he was currently working. All of this fueled speculation that he was either ill, had died, been captured by army generals or even flown to Switzerland to see the birth of a love child. The markets love to run with stories like this when there is nothing else to talk about, and this time was no exception. Russian yields on bonds increased and the equity markets in Russia had one of the worst weeks in a long time as thoughts of what would happen if the rumors were true made investors question their holdings. President Putin was shown in public early Monday morning and he seemed to be in good spirits, even joking about many of the rumors that were circulating. But this little episode does leave investors wondering what happens to Russia after Putin? With Russia being such a large player in the political sphere globally and such a large player in the energy markets around the world it is a major wildcard that at some point could be more than just rumors. From what I can find and what is publically available it is unknown as to how Russia will handle the eventual succession of power, but one thing is for sure, the global financial markets will have to react to any shift.

 

Market Statistics:

Index Change Volume
Dow -0.60% Above Average
S&P 500 -0.86% Above Average
NASDAQ -1.13% Average

 

All three of the major US indexes moved lower last week in a very volatile trading week as the market seemed to lack any real direction, bouncing around on various news and rumors throughout the week. The NASDAQ saw the weakest performance last week after being the top performing index for the past several weeks. The decline, however, was done on just average volume. As mentioned above, the Dow and the S&P continue to trade lower as they move further and further away from the positive technical levels we saw just a few short weeks ago and remain in a sort of “no man’s land” with very little support between the current and substantially lower levels.

 

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

 

Top 5 Sectors Change Bottom 5 Sectors Change
Real Estate 2.56% Natural Resources -3.12%
Pharmaceuticals 1.90% Energy -2.74%
Healthcare Providers 1.72% Oil & Gas Exploration -2.40%
Broker Dealers 1.50% Technology -2.28%
Biotechnology 0.87% Materials -2.00%

There is nothing that is really surprising on the top and bottom sector lists this week. With such a drastic decline in the price of oil it was not surprising to see that materials as well as various aspects of the energy industry comprised the bulk of the top 5 declining sectors. On the positive side, the same few names seem to keep coming up week after week, those being Healthcare, Pharmaceuticals and Biotechnology. In looking back at the sector performance of the past few weeks I see that Biotechnology, Pharmaceuticals and Healthcare have been among each of the past four weeks’ top 5 sectors. On the other side, Energy has been in the bottom 5 performing sectors of the markets for each of the past four weeks.

Fixed income has been on a very wild ride since the end of January as investors attempt to guess when the Fed will start to increase interest rates and what the markets will do, both for equity and fixed income investments, when rates to begin to increase:

Fixed Income Change
Long (20+ years) 2.61%
Middle (7-10 years) 1.01%
Short (less than 1 year) 0.00%
TIPS -0.41%

Last week it was the bull’s turn on the fixed income market as some of the economic data released, particularly the retail sales figures, were bad enough to make some economists think the Fed may hold off increasing rates in June in favor of waiting until September. The US dollar keeps getting stronger as the rest of the world seems to be either stepping into or wading through the quantitative easing unknown. The US dollar gained 2.67 percent against a basket of international currencies last week. The strongest of the major global currencies last week was the Japanese Yen as it lost 0.47 percent against the US dollar. The weakest of the major global currencies last week was the Euro as it fell by 3.20 percent against the value of the US dollar as the ECB continues its bond buying adventures. For the time being it looks like the rising US dollar is here to stay as the alternative currencies that investors could own look far less attractive.

Commodities and metals all sold off last week as there seemed to be a lot of fears of further downside moves in the markets:

Metals Change Commodities Change
Gold -0.88% Oil -9.92%
Silver -1.91% Livestock -2.90%
Copper -1.14% Grains -0.06%
Agriculture -2.30%

The overall Goldman Sachs Commodity Index turned in a loss of 5.48 percent last week. After moving virtually sideways for the better part of 5 weeks, Oil dropped by almost 10 percent last week and is down at almost the lowest level we have seen since the bottom of the great recession back in early 2009.  The decline on metals last week looked tame relative to oil, but across the board the metals also declined, with Silver being hit the hardest, giving up 1.91 percent, while Gold slid by 0.88 percent. So far Gold has held its key support level of $1,150 per ounce, but at the current rate of decline it looks like it will be a short matter of time before it breaks that level and forges ahead much lower. Even the soft commodities were hit last week with livestock falling almost 3 percent, while agriculture declined by 2.3 percent and grains gave up just a little.  If you were invested in commodities last week it seems there was nowhere to hide as everything moved lower.

On the international front last week, China saw the best performance of the week with the Shanghai based Se Composite Index gaining 4.06 percent. Russia could not manage to stay off the bottom of the list last week after rumors circulated about the health of President Putin, rumors the Kremlin has adamantly denied, even going so far as to publish old pictures of him working at his desk to prove that he is doing well. Overall, the MSCI Russian Capped Index declined by 8.15 percent, so it seems like the rhetoric from the Kremlin may not have been working as well as it would have liked.

The VIX last week increased by only 5.26 percent during a week that saw some much wider swings during the middle of the week. With such volatility being seen in the overall markets, as denoted by the number of days last week that the Dow moved by more than 100 points (four out of the five trading days),  it was a little surprising to not see the VIX move more than it did. At the current level of 16.00 the VIX is implying a move of 4.61 percent over the course of the next 30 days. As always, the direction of the move is unknown.

For the trading week ending on 3/13/2015, returns in FSI’s hypothetical models* (net of a 1% annual management fee) were as follows:

Last Week Year to Date
Aggressive Model 0.16 % 0.46 %
Aggressive Benchmark -1.32 % 0.33 %
Growth Model 0.05 % -0.06 %
Growth Benchmark -1.03  % 0.29 %
Moderate Model -0.03 % -0.44 %
Moderate Benchmark -0.73 % 0.23 %
Income Model -0.01 % -0.42 %
Income Benchmark -0.37 % 0.15 %

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

 

We made several changes to our models over the course of the previous week. The first was our initial repositioning for the eventual Fed interest rate hike. One of our most exposed areas of the markets to interest rate hikes was utilities as many people invest in these because of the dividends they pay, while savings accounts at banks pay next to nothing. We had three large holdings in utility companies that would be at risk as interest rates start to climb; they were Southern Company, Consolidated Edison and Wisconsin Energy. Last week we sold Southern Company across all models; this was done because it has the highest risk among the three utilities companies and was also providing the least amount of return. The second utility we will likely be selling in the coming weeks or month will be Wisconsin Energy, leaving us with just one: Consolidated Edison. Our individual utility holdings have all been held for longer than a year and in most cases since December of 2011. Another major change last week was selling part of our position in Powershares Low Volatility ETT (ticker SPLV). This position was used to participate more fully in the upside moves of the markets during uncertain times. At this point we were seeing increasing volatility within the fund and feel that cash or other investments may be a more prudent spot to invest. We also sold our partial position in Small Cap Growth (ticker RYWAX) over the course of the week. We made only one purchase last week and that was to increase our exposure to the US dollar, a position we started building late last year. We purchased the Rydex Strengthening Dollar fund (ticker RYSBX) in our more aggressive models, while utilizing the Profunds rising dollar fund (ticker RDPIX) in our lower volatility models. At this point we have raised cash across the models and are actively looking for investment opportunities for the market environment we are currently experiencing.

 

Economic News:  Last week was a slow week for economic news releases, but nearly everything that came out was negative. There were five releases that significantly missed expectations, highlighted below in red, and none that significantly beat market expectations:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Neutral 3/12/2015 Initial Claims Previous Week 289K 306K
Neutral 3/12/2015 Continuing Claims Previous Week 2418K 2421K
Negative 3/12/2015 Retail Sales February 2015 -0.60% 0.40%
Negative 3/12/2015 Retail Sales ex-auto February 2015 -0.10% 0.60%
Negative 3/13/2015 PPI February 2015 -0.50% 0.30%
Negative 3/13/2015 Core PPI February 2015 -0.50% 0.10%
Negative 3/13/2015 University of Michigan Consumer Sentiment Index March 2015 91.2 95.8

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

 

Last week the economic news releases were stacked on the last two trading days of the week, but that did not stop them from having their impact on the overall movement of the markets. On Thursday the standard weekly unemployment related figures were released with both figures coming in very close to market expectations and therefore not having much, if any, impact on the markets. Retail sales released later during the day, however, did have a noticeable impact as both overall sales and sales excluding auto sales fell during the month of February. Retail sales fell by six tenths of a percent while expectations had been for growth of four tenths of a percent. Falling retail sales are a major negative sign for the US economy and this is not the first negative print we have seen. Overall, retail sales have now declined during each of the last three months, as has the retail sales excluding gasoline and auto sales. The news did not improve on Friday when the Producer Price Index (PPI) showed that overall prices at the producer level declined by 0.5 percent, while core prices also declined by 0.5 percent. Overall, producer prices have now declined 4 consecutive months in a row. These falling prices combined with falling retail sales presents an interesting problem for the Fed as it debates when to start raising interest rates. Wrapping up the week on Friday was the release of the University of Michigan’s Consumer Sentiment Index for the month of March, which showed an unexpected decline of more than four percent. This decline in confidence somewhat mimics what we have been seeing recently in consumer spending and could be the start of a much bigger problem for the overall health of the US economy.

 

This week is a very slow week for economic news releases with all of the releases occurring on the last two trading days of the week. The releases highlighted below have the potential to move the overall markets on the day they are released:

 

Date Release Release Range Market Expectation
3/16/2015 Empire Manufacturing March 2014 8.8
3/16/2015 NAHB Housing Market Index March 2014 56
3/17/2015 Building Permits February 2014 1070K
3/17/2015 Housing Starts February 2014 1041K
3/19/2015 Initial Claims Previous Week 293K
3/19/2015 Continuing Claims Previous Week 2415K
3/19/2015 Philadelphia Fed March 2014 6.9

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

 

This week starts on Monday with the release of the Empire Manufacturing index for the month of March. The markets are expecting a slight increase in this figure, but it seems more likely that we will see a lower than expected print with the weather on the east coast during the month being blamed for the difference. Later during the day on Monday the NAHB Housing Market Index is set to be released with expectations of a small upward tick being shown. It would take a lot for the market to react to this release in any meaningful way. On Tuesday some more US housing market data is set to be released with the building permit and housing starts figures for the month of February being released. Both numbers are expected to post something over 1 million units, just as they did during January. On Thursday initial and continuing jobless claims are set to be released with both numbers not expected to have changed much during the course of the previous week. Wrapping up the week on Thursday is the release of the Philadelphia Fed Index for manufacturing, which is expected to show that manufacturing in the greater Philadelphia area picked up slightly during the month. The other major economic event this week will occur on Wednesday and is the Federal Reserve rate decision for the meeting that ends on Wednesday. While there are almost no expectations that rates will be moved this meeting, everyone will be patiently watching to see if the wording in the language pertaining to when rates may start up has changed.

 

Fun fact of the week—Waffle House

 

The Federal Emergency Management Agency (FEMA) uses something called the Waffle House Index when a natural disaster hits an area. There are three different levels for the index: Green, meaning the store is open and a full menu is being offered; Yellow, meaning the store is open, but a limited menu is being offered; and Red, meaning that the location is closed. During a disaster, all Waffle House locations report their current condition and this information is relayed back to FEMA.

 

Source: Federal Emergency Management Agency Director W. Craig Fugate

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