For a PDF version of the below commentary please see this link http://wp.me/Ppr8Z-23

Commentary quick take:

 

  • Market statistics:
    • US markets were mixed; big tech weighed heavily on the NASDAQ
    • Earnings season drove market returns
    • Oil had little impact on the markets
    • VIX decreased by more than 3 percent last week

 

  • Earnings season continued forward with some very awkward reactions
    • Big moves on many stocks both up and down as earnings were released
    • AMD jumped more than 50 percent
    • Google and Microsoft drug down NASDAQ after posting results
    • Energy earnings start in earnest this week

 

  • A potential “Brexit” continues to make headlines around the world
    • Potential US trade impact $114 billion annually
    • President Obama personally met with Prime Minster David Cameron to discuss

 

  • Japan experienced a series of earthquakes last week
    • The hardest hit area is a manufacturing hub for the country

 

  • US Federal Reserve still being closely followed
    • Low expectations for a rate hike at this week’s meeting
    • Fed still looking for two rate hikes during 2016
    • ECB on hold with new actions, awaiting Fed’s next move

 

  • Hybrid investments strategy update:
    • There were no changes last week
    • Volatility increased in the models on core position earnings announcements

 

  • Economic news releases:
    • Last week the economic news releases were worse than expected
    • This week the focus will be GDP and US consumers

 

  • This week for the markets:
    • All about earnings
    • The Fed meeting

 

  • Interesting Fact: Triple win for Prince in 1984


Major theme of the markets last week: Earnings uncertainty

 

The earnings reporting season is always an interesting time to watch the stock market as you can see wide swings on what looks to be very little changes in corporate earnings; this was certainly the case last week. A few companies that had great quarters in terms of revenues and earnings results saw their stocks decline due to the outlook or currency hits abroad. A few of the technology giants saw many aspects of their evolving businesses doing very well and yet investors looked for negative information and exploited it, pushing the stocks much lower than anticipated. Yet other companies booked unremarkable quarterly results and saw their stock price increase more than 50 percent. Last week was a bit of a guessing game for investors and it will likely remain an earnings-driven guessing game in the near term until we have more companies having reported earnings. Once we get a feel for how energy earnings will turn out for the quarter, the markets will likely start to trade more “normally.” Until then, there will likely be a lot of chopping on the broad indexes as investors adjust their positions to newly released information.

 

US news impacting the financial markets: Earnings supplied the biggest impact to the markets last week as earning’s season got more fully under way. Last week was a very interesting week for earnings releases as a few of the technology giants stumbled a little. Below is a table of the well-known companies that released earnings last week with earnings that missed expectations highlighted in red, while earnings that beat expectations by more than 10 percent are highlighted in green:

 

Abbott Laboratories 5% Honeywell International 2% PulteGroup 26%
Advanced Micro Devices 7% Intel 10% RLI 4%
Alphabet -5% IBM 12% Royal Caribbean Cruises pushed
American Airlines 6% J B Hunt Transport 4% Sherwin-Williams 11%
Bank of New York Mellon 9% Johnson & Johnson 2% Southwest Airlines 5%
Biogen 7% Kimberly-Clark 1% Stanley Black & Decker 11%
Blackstone -30% Kinder Morgan -37% Starbucks 0%
Caterpillar 0% Las Vegas Sands -26% Stryker 3%
Coca-Cola 2% Manpower Group 5% Swift Transportation 14%
D.R. Horton 11% Mattel -63% U.S. Bancorp 1%
DISH Network 29% McDonald’s 6% United Continental 5%
General Electric 0% Microsoft -2% United Rentals 18%
General Motors 25% Morgan Stanley 20% UnitedHealth 5%
Genuine Parts 2% Netflix 100% Verizon 0%
Goldman Sachs 4% Nucor -19% Visa 3%
Hanesbrands 18% Pepsi 10% Yahoo! 150%
Harley-Davidson 6% Philip Morris -12% Yum! Brands 14%

 

It was difficult last week to not notice the impact earnings season can have on individual companies. AMD, for example, turned in a good quarter, though it was far from a great quarter. The company announced a partnership agreement at the same time and was rewarded with its stock moving up by more than 50 percent in just a single trading day. Microsoft, on the other hand, saw revenues increase during the first quarter of 2016 up to $22.08 billion, and yet it missed earnings expectations by $0.02 per share and the company stock was rewarded with a decline of more than 7 percent during the following trading day (the largest single day decline for Microsoft in more than 18 months). The movement on Kimberly-Clark was very unusual as the company reported earnings that beat expectations, while revenues were short by about $40 million on $5 billion in total and yet the stock was pummeled on Friday by almost 3.7 percent. Google also made headlines last week as it saw a decline in ad revenue, but a large increase in cloud technology income. The stock was knocked down by more than 5 percent over fears that the old models Google used to follow are not working as well as they had in the past. Old school technology companies seem to be adapting to the new technology environment very well as Intel and IBM both posted good quarters as new technologies within their respective businesses grew faster than anticipated. Earnings season can be full of very interesting stock movements and last week was no exception.

 

According to Factset Research, we have seen 131 (26 percent) of the S&P 500 companies release their results for the first quarter of 2016. Of the 131 that have released, 76 percent have met or beaten earnings estimates, while 24 percent have fallen short of expectations. When looking at revenue of the companies that have reported, 55 percent of the companies have beaten estimates, while 45 percent have fallen short. With the large number of the S&P 500 component companies having reported earnings last week we saw a significant change in the above numbers. The percentage of companies that have beaten earnings expectations increased by 5 percent, while the percentage of companies beating revenues expectations fell by 5 percent when compared to the figures from last week. Typically, it is much more difficult for companies to alter their revenue figures than it is to alter (within the GAAP accounting rules) their earnings on a quarterly basis; so the changes seen over the last week are not as positive as they may seem at first glance.

 

This week there are more companies reporting earnings (1741 in total) across many different industries when compared to the previous week. The table below shows the companies that have the greatest potential to move the markets highlighted in green:

 

3M ConocoPhillips Mondelez
Aetna Domino’s Pizza Northrop Grumman
Aflac Dow Chemical Office Depot
Amazon.com Dr Pepper Snapple O’Reilly Automotive
Anthem Dunkin’ Brands Panera Bread
Apple eBay Phillips 66
Aptargroup Eli Lilly Procter & Gamble
Arthur J Gallagher Exxon Mobil Public Storage
AT&T Facebook Raytheon
Baker Hughes Ford Motor SunPower
Boeing Goodyear Tire & Rubber Texas Instruments
Buffalo Wild Wings Groupon Time Warner Cable
Cabela’s Helen of Troy Ltd T-Mobile
Capital One Financial Hershey Twitter
Cardinal Health J & J Snack Foods United Parcel Service
Chevron JetBlue Airways United States Steel
Chipotle Mexican Grill LinkedIn VF Corp
Coach Lockheed Martin Waste Management
Colgate-Palmolive Marriott International Whirlpool
Comcast MasterCard Xerox

 

Energy will be in the spotlight this week when corporate America continues to report earnings as several of the very large integrated oil and gas companies report their results. Exxon, Chevron, ConocoPhillips and Phillips 66 will set the tone for the rest of the energy sector this week and it will likely not be a very positive tone. Despite oil prices rebounding for the second half of the quarter prices were still depressed when compared to previous years’ levels and there were a number of companies that either stopped drilling or slowed down their drilling during the quarter. Energy will be the lynch pin on the earnings season this year. If the sector pulls out a good first quarter earnings season will likely be positive. If not, we are likely to see a negative sentiment about earnings season overall. In addition to Energy potentially moving the markets this week, big technology releases continue as Apple is set to report its first quarter earnings, which is almost always a market mover as the index is such a large percentage weighting in many technology related indexes. Facebook and LinkedIn will also be closely watched by Wall Street this week as they too are technology giants that form the direction of technology in general. MasterCard and UPS both release their earnings this week as well and will be closely watched by investors because of the large amount of information that each company has about consumer spending in the US. MasterCard processes millions of transactions every year and has a very good feel for spending, while UPS ships millions of packages to end consumers and businesses and has a very good feel on spending in the US economy as well.

 

An ever present impact on the US financial markets is the US Federal Reserve and its potential to move interest rates; this was seen last week headed into its April meeting this Wednesday. When looking at the latest Fed watch figures from the CME group (table to the right) there is currently no chance of a Fed rate hike at this week’s meeting. The chance of a rate hike does not even cross 50 percent until the November meeting, if you believe what the CME and Fed Funds futures prices tell investors. It seems unlikely to me that we will see a rate hike in both November and December and with Chair Yellen having stated that she wants to see two rate hikes during 2016, it seems like June or July would be a good starting point for a hike with a second hike at the end of the year. The ECB (European Central Bank) has said that it will wait on implementing new policies until after the Fed in the US increases rates. It seems unlikely the ECB will be able to sit on its hands until very late this year and not have to take some kind of further action to try to spur growth as so many of the interest rates that sovereign governments within the EU are able to sell bonds at are negative.

Fed watch 4-25-16

Global news impacting the markets:

 

With even President Obama weighing in personally on the situation in the UK as it faces the looming vote about whether it should stay or leave the EU, the topic of the “Brexit” made many headlines last week. On June 23rd there will be a referendum vote in the UK and it asks a relatively simple question:

 

“Should the United Kingdom remain a member of the European Union or leave the European Union?”

 

With the choices for the answer being:

 

Remain a member of the European Union

or

Leave the European Union

 

Such a simple question and yet the ramifications of the results could be widely felt both in Europe and around the world. President Obama last week made a stop in London with his wife and personally met with Prime Minister David Cameron as well as other royals as he tried to reiterate how important it is for the UK to remain a part of the EU. One of his main points was that if the UK chooses to leave, trade deals would have to be drawn up anew with the US and the UK and the process could take a very long time as the UK would be at the back of the line of countries wanting to hammer out trade deals with the US. This could hurt both countries if trade between the US and the UK was slowed as the value of the total trade between the two countries, according to the US Census Bureau, is about $114 billion every year (as of 2015). According to Ladbrokes Politics (a betting house in the UK) the odds of a Brexit occurring actually went down to a new low of 26 percent following President Obama’s visit to the UK. This was down from 34 percent just a few days earlier. So perhaps President Obama weighing in did actually help the group that wants the UK to remain in the European Union. The other major story last week dealt with Japan and was the large number of earthquakes and tremors that hit the country early last week.

 

Japan experienced several earthquakes last week in the southern region of the country almost exactly 5 years after the devastating earthquakes that rocked the northern region of Japan and caused the nuclear melt down at the Fukushima power plant. This time there was no melt down of a nuclear power plant and no tsunami rushing ashore, but the earthquakes did hit a region that has a lot of manufacturing. The southern region of Japan where the earthquakes hit has a lot of manufacturing both in the automotive sectors as well as heavy machinery and semiconductors for many multinational companies. While the amount of damage caused by the earthquakes is still unknown, many of the production plants in the area remained closed for the full week last week as assessors feared further quakes damaging the region and decided to slow their physical assessments of many of the buildings. If the damage is extensive, it could take a few months to get everything back online at many of these facilities, which could cause a bottle neck for integral parts needed around the world. This in turn could have noticeable impacts on many of the world’s largest companies. The immediate effects of the earthquakes to the financial markets in Japan seemed to be positive as the Japanese Nikkei was the best performing index for the week, gaining more than 4 percent for the week; some of this movement, however, could have been due to movement in the Yen.

 

Technical market review: Not much changed in terms of the technical strength of any of the three major US indexes last week, as one index remains above its most recent resistance level, while the other two remain below. The charts below show each of the three major indexes, plus the VIX, drawn with green lines. The red lines on the three major indexes depict the closest resistance levels the indexes may hit in the coming trading weeks, as represented by points that have been tested on each index several times in the last 6 months. For the VIX, the red line remains the rolling 52-week average level of the VIX.

4 charts combined 4-25-16

The Dow (upper right pane above) is the strongest of three major indexes even as the index moved down toward the previous resistance level and then bounced upward to end the week. In second place, in terms of strength, is the S&P 500 (upper left pane above) as it failed to break above its most recent resistance level after making a run at it during the first part of last week. The NASDAQ (lower left pane above) is in third place in terms of technical strength as it moved lower over the course of the previous week and still has a very long way to go to get close to the major resistance level last seen back in November of 2015. The VIX (lower right pane above) is currently right back down at the low point that we have seen so far this year after pushing slightly lower over the course of the previous week. The VIX still seems very low given the large number of uncertainties facing investors today, but the financial markets have an uncanny ability to climb the wall of worry and that seems to be shown in the VIX at the current time.

 


Market Performance: Last week saw a mixed result for the US indexes as two moved higher and one failed to keep up:

 

Index Change Volume
Dow 0.57% Below Average
S&P 500 0.52% Average
NASDAQ -0.65% Below Average

 

Volume overall was below average, and would have been even lower had it not been for earnings season boosting certain stocks on the day the earnings were released.

 

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

 

Top 5 Sectors Change Bottom 5 Sectors Change
Oil & Gas Exploration 7.50% Utilities -3.05%
Energy 5.77% Residential Real Estate -2.23%
Natural Resources 5.72% Global Utilities -1.95%
Regional Banks 4.57% Technology -1.93%
Broker Dealers 4.31% Consumer Staples -1.21%

With oil moving up by nearly 5 percent due to the oil worker strike in Kuwait it was not surprising to see that oil and gas exploration as well as energy took the top two performing spots. Defensive sectors of the markets continued to be under pressure last week with Utilities, Real Estate and Consumer Staples all posting losses in what looks like a continuation of the risk off trade that was seen last week.

Fixed income markets were all negative last week as investors seemed to be unsure of which investments to hold onto leading up to the Fed meeting this week:

Fixed Income Change
Long (20+ years) -2.67%
Middle (7-10 years) -1.04%
Short (less than 1 year) 0.03%
TIPS -0.45%

Currency trading volume was average last week, with little movement overall relative to what we have been seeing over the past month. The US dollar increased by 0.45 percent against a basket of foreign currencies, as speculators continue to think the Fed will have a difficult time increasing interest rates more than twice during 2016, as indicated by the above Fed watch table. The best performance of the global currencies last week was the British Pound as it gained 1.50 percent against the value of the US dollar. The increase in the value of the pound was due to the decreased chance of a Brexit as a result of the upcoming election. The weakest of the major global currencies last week was the Japanese yen as it declined by 2.58 percent against the value of the US dollar, which ultimately helped exporters and pushed the Japanese stock market higher for the week.

Commodities were mixed over the course of the previous week, as Oil moved higher, while Gold and Livestock moved lower:

Metals Change Commodities Change
Gold -0.03% Oil 4.98%
Silver 4.33% Livestock -3.06%
Copper 5.64% Grains 0.54%
Agriculture 0.05%

The overall Goldman Sachs Commodity Index advanced by 3.31 percent last week, as Oil increased 4.98 percent, thanks mostly to the three day strike in Kuwait, despite the talks of a production freeze falling apart early last week in Doha. The major metals were mixed last week with Gold selling off -0.03 percent, making it two weeks in a row of declines for Gold. The more industrially used Silver and Copper gained 4.33 and 5.64 percent respectively. Both Silver and Copper have now made it two positive weeks of movement in a row. Soft commodities were mixed last week with Livestock falling 3.06 percent, while Grains advanced 0.54 percent and Agriculture overall moved higher by 0.05 percent.

Last week was a very mixed week in terms of global indexes with about half moving higher, while half moved lower. The best performing index outside of the US last week was found in Japan, with the Nikkei 225, which turned in a gain of 4.3 percent, as the weakened Yen boosted exporters within the country. The worst performing index last week was found in China and was the Shanghai SE Composite index, which turned in a loss of 3.9 percent for the week as weak economic numbers continue to come out of China, questioning the recovery that we have seen over the last few months.

The VIX moved lower last week during what turned out to be a muted week for the VIX, giving up only 2.94 percent. The VIX is now at roughly the same low point it has reached three times in the past two months, which is the lowest point in the past year. The current reading of 13.22 implies that a move of 3.81 percent is likely to occur over the next 30 days. As always, the direction of the move is unknown.

For the trading week ending on 4/22/2016, returns in the hybrid hypothetical models* (net of a 1% annual management fee) were as follows:

  Last Week 2016 YTD Since 6/30/2015
Aggressive Model -0.73 % 1.01 % 5.33 %
Aggressive Benchmark 0.74 % 1.74 % -3.43 %
Growth Model -0.72 % 0.89 % 4.23 %
Growth Benchmark 0.58  % 1.43 % -2.51  %
Moderate Model -0.75 % 0.65 % 3.38 %
Moderate Benchmark 0.41 % 1.08 % -1.66 %
Income Model -0.91 % 0.93 % 3.55 %
Income Benchmark 0.21 % 0.61 % -0.69 %
S&P 500 0.52 % 2.33 % 1.38 %

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

 

There were no changes to the hybrid models over the course of the previous week. Much of the performance divergence between the benchmarks, the main US indexes and the models last week was due to earning announcements or other one-off events pushing individual securities in the models lower. In general, the consumer staples and consumer discretionary sectors of the markets continued to struggle last week, but rebounded slightly on Friday. The movement of the models in the opposite direction of the broad indexes is not unusual, but it can be a little concerning for the near term future movements of the markets. As the more defensive sectors of the markets greatly lag the broad indexes, it is a sign that the more risky areas of the markets are performing very well. In this cycle, those risky areas have been energy and financials.

 

It would not be surprising, given the elevated levels of the indexes, to see them roll over in the near term following the downward lead of the defensive sectors of the markets. None of the signals have tripped to indicate that it is time to start being even more defensively positioned, but several signals are getting very close to flashing. If a signal trips to get more defensive in the models, adjustments will be made to lower the overall risk in the models, starting with selling the most risky of the mutual fund holdings. That action would be followed by adding hedging positions to protect against the downside risks in the stock holdings if the risks to further downward movement remain elevated.

 

Economic Release Calendar: Last week was a slow mid-month week for economic news releases with the data overall coming in below market expectations. There was one release that significantly missed market expectations (highlighted in red below) and none that significantly beat market expectations:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Neutral 4/18/2016 NAHB Housing Market Index April 2016 58 59
Neutral 4/19/2016 Building Permits March 2016 1089K 1200K
Neutral 4/19/2016 Housing Starts March 2016 1086K 1170K
Neutral 4/20/2016 Existing Home Sales March 2016 5.33M 5.30M
Neutral 4/21/2016 Initial Claims Previous Week 247K 263K
Neutral 4/21/2016 Continuing Claims Previous Week 2137K 2141K
Negative 4/21/2016 Philadelphia Fed April 2016 -1.6 9.9

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

 

Last week the economic news releases started on Monday with the release of the NAHB housing market index, which posted a reading of 58, a full point lower than the anticipated 59 reading. While the reading was lower, it was not significantly lower and therefore had little impact on the overall markets or the housing related stocks. Building permits and housing starts, both for the month of March and both released on Tuesday, also slightly missed expectations, but these too seemed to have little impact on the overall markets, as the month they were reported for was still not historically a strong month for housing figures due to a large part of the US still being in the throes of winter. On Wednesday existing home sales, much like the other housing related figures last week, came in slightly lower but very close to market expectations, having little impact on the markets of housing stocks. On Thursday the standard unemployment related figures were released with both numbers coming in slightly lower than anticipated, which was positive. However, the markets were focused on the Philadelphia Fed Index for the month of April, which registered a -1.6 reading, while the market had been expecting a reading of 9.9. This release is the opposite of what we saw out of the Empire Index two weeks ago that showed manufacturing expanding in the greater New York area for the first time in 7 months. The Philly number suggests that the pop in New York last month may have just been a one-off event and calls into question the recovery in manufacturing that many economists have been pointing to in the past two weeks. With the data mixed on manufacturing we will have to wait for the next month of data to start rolling in to see if an uptrend has formed or not.

 

This week is a busy week for economic news releases, but as mentioned above all eyes will be on the Federal Reserve meeting:

 

Date Release Release Range Market Expectation
4/25/2016 New Home Sales March 2016 521K
4/26/2016 Durable Orders March 2016 1.70%
4/26/2016 Durable Goods -ex transportation March 2016 0.50%
4/26/2016 Case-Shiller 20-city Index February 2016 5.60%
4/26/2016 Consumer Confidence April 2016 96.7
4/27/2016 Pending Home Sales March 2016 0.30%
4/27/2016 FOMC Rate Decision Current Meeting 0.50%
4/28/2016 GDP-Adv. Q1 2016 0.90%
4/28/2016 Initial Claims Previous Week 259K
4/28/2016 Continuing Claims Previous Week 2135K
4/29/2016 Personal Income March 2016 0.30%
4/29/2016 Personal Spending March 2016 0.20%
4/29/2016 Core PCE Prices March 2016 0.10%
4/29/2016 Chicago PMI April 2016 53.3
4/29/2016 University of Michigan Consumer Sentiment April 2016 90

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

 

This week the economic releases start on Monday with the release of more housing related data as the New Home sales figure for the month of March is released. If this release goes like the previous housing related releases have gone, we will likely see a little bit of a miss on this release, but it will not be enough for the markets to take any notice. On Tuesday the markets will start to focus on the overall US economy and the US consumer as the durable goods orders and consumer confidence are both released. Durable goods orders are expected to have increased during the month of March by 1.7 percent overall and 0.5 percent when excluding transportation, but this indicator can be greatly variable so it would take a very wide deviation from expectations for the markets to really take notice. The big thing that the market will be looking for is that both figures for the durable goods orders remain positive. If either one goes negative we could see an adverse reaction on the main indexes. Consumer confidence is also set to be released on Tuesday, but the release will likely take a back seat to the durable goods orders and we would have to see a wide deviation from expectations for much of a market reaction. On Wednesday the focus will be on the US Federal Reserve even though it is highly unlikely that they will raise interest rates, the Wall Street will still go over the press release very closely for any hints as to when the fed is thinking of increasing rates in the future. On Thursday the advanced estimate of GDP for the first quarter of 2016 here in the US is set to be released and as always this release could impact the overall markets. Expectations are for a 0.9 percent reading, which seems a little low so we could be in for an upside surprise on this release, which should be positive for the markets. On Friday personal income and spending are both set to be released with both expected to show positive, but very small increases during the month of March. Spending is the more important of the two figures as consumer spending plays a very large part in the overall US economy. Later during the day on Friday the Chicago area PMI for the month of April is set to be released and it will be an important figure because it will either lean toward the positive Empire figures released two weeks ago or toward the more negative Philly number that was released last week. Wrapping up the week on Friday is the release of the University of Michigan’s consumer sentiment index for the month of April (final estimate), which is expected to show no change over the reading at the middle of the month.

 

Interesting Fact Triple win for Prince in 1984

Prince SIMULTANEOUSLY HELD THE NUMBER ONE SPOTS FOR FILM, SINGLE, AND ALBUM. During the week of July 27, 1984, Prince’s film Purple Rain hit number one at the box office. That same week, the film’s soundtrack was the best-selling album and “When Doves Cry” was holding the top spot for singles.

 

Source: Billboard

For a PDF version of the below commentary please see my PDF files page located here http://wp.me/Ppr8Z-23

Commentary quick take:

 

  • Market statistics:
    • US markets moved higher last week
    • Increase last week occurred during a risk-on trading week
    • Hopes over OPEC deal drove much of the gains
    • VIX decreased by more than 11 percent last week

 

  • Earnings season officially started last week
    • Earnings have been just okay, helped by cost cutting
    • Financials turned in a good week thanks to earnings
    • This week the releases get going in earnest
    • Expectations for earnings remain low, especially for energy

 

  • “Risk-on” trade occurred last week
    • Investors sold less risky assets in favor of more risky holdings
    • OPEC meeting was one of the driving factors behind the risk-on trades
    • Fed looks likely to delay raising rates longer than first thought

 

  • Oil moved higher last week, ahead of the OPEC meeting
    • US market correlation between oil and equity indexes was positive last week
    • Oil set to move lower to start the week after a failed meeting in Doha
    • No oil production freeze agreement reached at the OPEC meeting

 

  • IMF lowered global growth outlook again in the latest World Economic Outlook

 

  • Uncertainty in Brazil after impeachment vote for President Rousseff in the lower house of Parliament on Sunday

 

  • Hybrid investments strategy update:
    • There were no changes last week in the models as the markets were trading away from many of the defensive positions in the models

 

  • Economic news releases:
    • Last week the economic news releases were mixed
    • This week the focus will be on housing indicators

 

  • This week for the markets:
    • Earnings speculation will be the main topic this week
    • Oil prices will once again come into focus as they are likely to push lower

 

  • Interesting Fact: Infamous Sixteen Impeachments in the US


Major theme of the markets last week: RISK ON! The US and global financial markets were in a full risk-on trading situation last week as investors moved out of assets seen as being safe haven assets in favor of more risky assets. Telltale sectors of the markets such as Real Estate, Consumer Staples, Consumer Products and Utilities all struggled to perform well last week as higher risk sectors of the markets such as Financials, Energy and Small Cap stocks all pushed higher. During the risk-on trade, volatility as measured by the VIX pushed lower by more than 10 percent, ending the week near the lowest point we have seen over the past year. If there was economic risk associated with a specific company it probably had a good week last week. The same can be said about countries as well, as money seemed to be leaving the developed countries in favor of the emerging market countries; even countries such as Japan had a strong week despite the very obvious troubles that lie ahead in terms of economic uncertainty. Driving forces behind the risk on trade seen last week included earnings season in the US starting off better than expected, oil prices continuing to rebound and a poor IMF report that investors took as positive as it may contribute to keeping US interest rates low for longer than anticipated.

 

US news impacting the financial markets: The main news story that hit the US media that impacted the financial markets was the start of the first quarter 2016 earnings season. Several of the largest banks in the US reported earnings last week and in general profits were down, but the companies still posted better than expected earnings numbers, primarily by cutting expenses during the quarter. The market, however, did not seem to care much for how the companies beat earnings, just that they did beat analyst expectations. In fact, according to Factset Research, companies that have beaten earnings expectations so far for the first quarter of 2016 have enjoyed an average gain of 2.3 percent for the week around the earnings release (two days prior through two days after). This may seem somewhat normal, but the figure is almost double what the average has been over the past five years. The more surprising aspect to earnings season thus far is the fact that when a company missed earnings expectations, they have on average gained 0.3 percent, while historically they have lost 2.2 percent during the week around earnings. In short, so far during this first quarter earnings season, companies are being rewarded if they beat or fall short of earnings expectations, but we are still only about 7 percent of the way through earnings season, so a lot could change in the coming weeks. With earnings season off to such a strong looking start it was not surprising to see that investors decided to increase the risk of their investments during the week, pushing many of the best performing sectors of the markets over the past several months lower. As you can see below in the next section, there has been a lot made about the start of earnings season, but it is only the start and rarely does a full earnings season turn out to be anywhere close to how it starts off.

 

Last week was the official start of earnings releases for the first quarter of 2016, with Alcoa kicking things off. Below is a table of the well-known companies that released earnings last week with earnings that missed expectations highlighted in red, while earnings that beat expectations by more than 10 percent are highlighted in green:

 

Alcoa 250% Citigroup 7% Kinder Morgan pushed
Bank of America -5% CSX 0% Progressive -16%
BlackRock -1% Delta Air Lines 2% Reynolds American pushed
Charles Schwab 0% JPMorgan Chase 7% Wells Fargo 1%

 

Alcoa kicked things off last week with an earnings beat that came in better than the market had expected, beating estimates by $0.05. However, it was not all positive for Alcoa last week as the company lowered its overall guidance for the company for the rest of 2016, citing lower demand from the aerospace and defense sector as well as a business division it is planning on spinning off into a separate company. But, Alcoa kicked things off positively, so if the saying holds true, this quarter earnings could be better than expected. As mentioned above, the financial firms that released their earnings last week were mostly positive, largely due more to financial wizardry and accounting magic than to actual increases in revenues, as companies cut many expenses during the quarter to look better at the end of the quarter.

 

According to Factset Research, we have seen 35 (7 percent) of the S&P 500 companies release their results for the first quarter of 2016. Of the 35 that have released, 71 percent have met or beaten earnings estimates, while 29 percent have fallen short of expectations. When looking at revenue of the companies that have reported, 60 percent of the companies have beaten estimates, while 40 percent have fallen short. If these numbers hold throughout the quarter it would be a very positive quarter for earnings results. All of the above percentages are somewhat unreliable as we have such a small sampling of companies that have reported earnings so far for the first quarter of 2016. We should have a much clearer picture of how earnings season will go after this week when we have 109 of the S&P 500 component companies report their results. We also start to see the earnings of the energy industry, which will likely be very poor despite the price of oil moving upward for the back half of the quarter.

 

This week there are a much higher number of companies reporting earnings (657 in total) across many different industries. The table below shows the companies that have the greatest potential to move the markets highlighted in green:

 

Abbott Laboratories Honeywell International PulteGroup
Advanced Micro Devices Intel RLI
Alphabet International Business Machines Royal Caribbean Cruises
American Airlines J B Hunt Transport Services Sherwin-Williams
Bank of New York Mellon Johnson & Johnson Southwest Airlines
Biogen Kimberly-Clark Stanley Black & Decker
Blackstone Kinder Morgan Starbucks
Caterpillar Las Vegas Sands Stryker
Coca-Cola Manpower Group Swift Transportation
D.R. Horton Mattel U.S. Bancorp
DISH Network McDonald’s United Continental
General Electric Microsoft United Rentals
General Motors Morgan Stanley United Health
Genuine Parts Netflix Verizon Communications
Goldman Sachs Nucor Visa
Hanesbrands Pepsi Yahoo!
Harley-Davidson Philip Morris International Yum! Brands

 

Google (Alphabet) will probably be the most closely watched earnings release this week and also the release with the most potential for moving the overall markets. It seems to be a bellwether company for all of the technology sector as it has now expanded into many different areas of technology. IBM, Intel and Microsoft will round out the major technology companies that will be closely watched. Visa, which releases earnings later in the week will be very closely watched as the company has some of the best data about consumer spending of any companies in the world because so many people and businesses use Visa credit cards. If Visa misses expectations, it could lead to investors thinking that consumer spending may fall in the near term, which could be poor for the equity indexes both here in the US and around the world. Consumer staple companies also start to release earnings this week as J&J, Kimberly Clark, Coca-Cola and Pepsi all release their earnings. One theme to watch for this quarter is the impact of the movement of the US dollar on multinational corporations as currency movements can either add or remove billions of dollars from earnings very quickly. Oil is also something that will likely be cited by more than just a couple of the companies that release earnings this week and we seem to be headed into a very volatile time for oil.

 

Global news impacting the markets: Oil was the main news story on the international front that had an impact on the global markets with much speculation about the OPEC meeting held over the past weekend in Doha, Qatar. The OPEC meeting was one of the two scheduled production meetings the group has on an annual basis. Emergency and other meetings can be called at almost any time, so there are far more meetings than just two, but this was one of the main ones. Going into the meeting there was a lot of speculation that the production freeze that had been floated by Russia and Saudi Arabia back in the middle of February would actually be finalized at this meeting. However, politics and religion seemed to be in the way of a deal as the Saudis said there would not be a deal unless Iran agreed to freeze production at January levels. Iran decided to skip the meeting in Doha altogether. Many traders and economists around the world had been speculating that the price of oil was too valuable to all of the OPEC countries for a spat between two countries to derail the whole agreement—a spat that may be religiously based—but that is exactly what happened. To Iran’s credit, there is little incentive to agree to an agreement that essentially keeps its oil production severely cut back to the levels it experienced under international sanctions in January when it was not exporting much crude at all. Iran has only recently been allowed to ship crude around the world after years of sanctions; if Iran had agreed to the freeze, it would have essentially kept the market shares of Saudi Arabia and other countries in tact, while keeping Iranian oil out of the global markets.

Without Iran signing on to the deal, the Saudis decided not to back the deal either. Without the support of Saudi Arabia, OPEC has almost no say over oil prices or production. After the fallout of the meeting was made known, the price of oil fell by at least 7 percent around the world as all of the bullishness on oil prices seemed to evaporate even faster than the production freeze deal. The decline in oil prices was short lived. More than half of the losses were recovered prior to the markets opening here in the US as a strike in Kuwait by oil field workers temporarily took more than 60 percent of the country’s oil production off the table. The strike has been happening now for 2 days, but like most oil production strikes in the Middle East, the government in Kuwait will likely bow to the demands of the protesters as significantly less oil production for even just a few days has a much larger negative impact on the country than giving the striking workers what they want. In the longer term, the run up in the price of oil that we have seen since the middle of February is now in question as the freeze in production was the primary driving force behind the increase. It seems that as oil prices move lower, the OPEC members in disagreement about production levels will likely come together and agree to some kind of production cut, but with so many countries involved and many different angles being played, anything can happen with the OPEC production. Contributing to the oversupply of oil in the world markets, oil demand has been flat now for two quarters and likely moved lower during the first quarter of 2016 once the final numbers come in. There is typically a dip in demand during the first quarter of a year as the northern hemisphere is in and coming out of winter. The chart below is from the IEA and shows the global demand for oil in millions of barrels of oil per day. The first quarter 2016 bar has yet to be drawn:

world oil demand 4-18-16

The other global news story that seemed to have an impact on the markets, at least the regional markets, was Brazil and the impeachment of President Dilma Rousseff. On Sunday, the lower house of Parliament in Brazil voted to impeach the current President of Brazil over charges of corruption and mismanagement of government funds. With Brazil being in the international spotlight already for its handling of the Zika virus and the upcoming Summer Olympic Games, having a President being impeached is just one more thing going poorly for the struggling country. Up next in Brazil is a vote in the Senate to see if the charges against the President will stand. There are also two potential appeals the President can attempt. If the Senate does “confirm” the impeachment and the appeals are completed, President Rousseff would immediately be taken out of office. Were this to happen it would increase the uncertainty in the region, and with Brazil being such a large commodity supplier around the world it could have a negative impact on other countries as well. The final global news item to impact the financial markets last week came from the IMF and it was not positive.

 

Last week the International Monetary Fund (IMF) released its semiannual world economic outlook in which it lowered its expectations for 2016 globally in terms of GDP Growth. GDP was lowered from 3.4 percent down to 3.2 percent as a wide range of countries saw downgrades in growth. Japan saw its growth expectations cut down to 0.5 percent from 1 percent in the last outlook, while Brazil was cut to a contraction of 3.8 percent this year, down from 3.5 percent in the previous report. One bright spot in the report is that the IMF now thinks China will grow faster than previously expected, increasing from 6.3 percent up to 6.5 percent growth during 2016. A few  of the reasons the IMF outlined for why it lowered the overall expectations in global GDP for 2016 include the refugee situation in Europe, a potential Brexit, volatility in the financial markets around the world and central bank uncertainty.

 

Technical market review: One of the three major US indexes managed to break above a resistance level, while another came close and the third made no real attempt at even closing the gap. The charts below show each of the three major indexes, plus the VIX, drawn with green lines. The red lines on the three major indexes depict the closest resistance levels the indexes may hit in the coming trading weeks, as represented by points that have been tested on each index several times in the last 6 months. For the VIX, the red line remains the rolling 52-week average level of the VIX.

4 charts combined 4-18-16

The Dow (upper right pane above) is the strongest of three major indexes, despite the NASDAQ (lower left pane above) breaking above its most recent support level. In second place in terms of strength is the S&P 500 (upper left pane above) as it has yet to make it above its previous high points from October and November (the straight line drawn across these two points make the resistance level). The NASDAQ is in third despite it having a good week last week and moving above a resistance level. The index still has a significant way to go in order to achieve the resistance level that would be drawn at the high point of November and December of 2015.

 


Market Performance: Last week saw all three of the major US indexes move higher on a risk-on trading week:

 

Index Change Volume
Dow 1.82% Below Average
NASDAQ 1.80% Below Average
S&P 500 1.62% Average

 

One of the surprising aspects to the trading week last week was that the telltale signs of a risk-on week were in place and yet the Dow performed the best of the indexes. Typically, the NASDAQ leads the way higher in a risk-on trading environment, but earnings expectations for many of the Dow component companies turned the tide and pushed the index to the best performance of the week.

 

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

 

Top 5 Sectors Change Bottom 5 Sectors Change
Regional Banks 6.38% Residential Real Estate -1.49%
Financial Services 5.75% Technology -0.71%
Materials 5.49% Pharmaceuticals -0.35%
Broker Dealers 5.39% Consumer Goods 0.12%
Financials 5.01% Utilities 0.19%

As mentioned earlier, anything related to financials seemed to have a good week last week as a large number of the key companies in the sector turned in results that beat expectations, despite the positive news being almost entirely due to expenses being cut. On the flip side, as mentioned above, many of the historically defensive sectors had a rough week last week with Real Estate, Consumer Goods and Utilities taking three of the bottom five sector positions.

Fixed income markets were all negative last week as investors moved away from the safety of fixed income and into the more risky equity side of investments:

Fixed Income Change
Long (20+ years) -0.10%
Middle (7-10 years) -0.28%
Short (less than 1 year) -0.01%
TIPS -0.46%

Currency trading volume was average last week after seeing elevated volume for the prior three weeks, thanks to movements in the Japanese Yen. The US dollar increased by 0.49 percent against a basket of foreign currencies, as speculators continue to think the Fed will have a difficult time increasing interest rates more than twice during 2016. The best performance of the global currencies last week was the Australian Dollar as it gained 2.22 percent against the value of the US dollar. The increase in the value of the Australian Dollar was due to the strong upward movement seen in both the Copper and the Silver markets last week as metals and mining play a key role in the Australian economy. The weakest of the major global currencies last week was the Swiss Franc as it declined by 1.47 percent against the value of the US dollar.

Commodities were mixed over the course of the previous week, as Oil moved higher, while Gold and Livestock moved lower:

Metals Change Commodities Change
Gold -0.43% Oil 2.19%
Silver 5.75% Livestock -2.61%
Copper 3.76% Grains 3.80%
Agriculture 1.23%

The overall Goldman Sachs Commodity Index advanced by 1.86 percent last week, as oil increased 2.19 percent on hopes of a production freeze out of the OPEC meeting, a freeze that did not materialize over the weekend. The major metals were mixed last week with Gold selling off (-0.43 percent) as it was viewed as a safe haven asset in favor of the more industrially used Silver and Copper, which gained 5.75 and 3.76 percent respectively. Copper’s move last week made back almost exactly half of what the metal had declined over the previous two weeks. Soft commodities were mixed last week with Livestock falling 2.61 percent, while Grains advanced 3.80 percent and Agriculture overall moved higher by 1.23 percent.

Last week most of the global equity indexes moved higher, while moving in lock step with the US markets. The best performing index outside of the US last week was found in Japan, which turned in a gain of 6.5 percent, as the Yen stabilized and even moved slightly higher last week on manufacturing data. The worst performing index last week was found in Indonesia and was the Jakarta Composite index, which turned in a loss of 0.5 percent for the week.

The VIX moved lower last week during the risk-on trading week, falling by 11.33 percent. The VIX is now at roughly the same low point it has reached three times in the past two months, which is the lowest point in the past year. The index seems to be pricing in everything with the financial markets and the global economy moving forward without any hiccups. This seems a little too optimistic. The current reading of 13.62 implies that a move of 3.93 percent is likely to occur over the next 30 days. As always, the direction of the move is unknown.

For the trading week ending on 4/15/2016, returns in the hybrid hypothetical models* (net of a 1% annual management fee) were as follows:

  Last Week 2016 YTD Since 6/30/2015
Aggressive Model 0.45 % 1.76 % 6.11 %
Aggressive Benchmark 2.23 % 0.99 % -4.15 %
Growth Model 0.24 % 1.62 % 4.99 %
Growth Benchmark 1.73  % 0.84 % -3.07  %
Moderate Model -0.02 % 1.41 % 4.16 %
Moderate Benchmark 1.24 % 0.67 % -2.06 %
Income Model -0.25 % 1.85 % 4.50 %
Income Benchmark 0.62 % 0.40 % -0.89 %
S&P 500 1.62 % 1.80 % 0.85 %

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

 

There were no changes to the hybrid models over the course of the previous week. In general the hybrid models remain almost fully invested, but with the investments currently in the models being low volatility focused. The holdings in the models tend to perform well in times of uncertainty, but are susceptible to underperformance in times of risk-on trading. Investments that we are closely watching and would like to purchase at some time in the future include Oil and Gas, Energy and Healthcare and to fill out the current partial positions in Transportation and Technology.

 

Economic Release Calendar: Last week was a typical mid-month week for economic news releases with the data overall coming in mixed. There were two releases that significantly missed market expectations (highlighted in red below) and one that significantly beat market expectations (highlighted in green):

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Neutral 4/13/2016 PPI March 2016 -0.10% 0.30%
Neutral 4/13/2016 Core PPI March 2016 -0.10% 0.20%
Negative 4/13/2016 Retail Sales March 2016 -0.30% 0.10%
Slightly Negative 4/13/2016 Retail Sales ex-auto March 2016 0.20% 0.40%
Neutral 4/14/2016 CPI March 2016 0.10% 0.30%
Neutral 4/14/2016 Core CPI March 2016 0.10% 0.20%
Neutral 4/14/2016 Initial Claims Previous Week 253K 268K
Neutral 4/14/2016 Continuing Claims Previous Week 2171K 2162K
Positive 4/15/2016 Empire Manufacturing April 2016 9.6 2.3
Negative 4/15/2016 University of Michigan Consumer Sentiment April 2016 89.7 92

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

 

The economic news releases last week started out on Wednesday with the release of the Producer Price Index (PPI) and the retail sales figures, both for the month of March. The PPI showed that prices at the producer level declined by one tenth of a percent, both overall and when looking at core PPI, which is not a positive sign for the Fed having the ability to increase interest rates. In fact, in normal economic cycles the Fed would actually be cutting interest rates if prices were consistently falling to try to boost information (positive price movement). Retail sales overall came in worse than anticipated last week, falling by 0.3 percent, while expectations had been for an increase of 0.1 percent. The fallout of the release was somewhat muted because retail sales excluding auto sales were still positive as they registered growth of 0.2 percent for the month. On Thursday the Consumer Price Index (CPI) was released as was the standard weekly unemployment claims figures. Both CPI numbers posted a gain of 0.1 percent, well below the Fed’s target rate of 2 percent on an annualized basis. The two jobless figures came in mixed, but close enough to expectations that there was no noticeable impact on the overall markets by the releases. Friday was a very mixed day for economic news releases as the Empire Manufacturing index turned in a strong positive reading of 9.6, while the markets had been expecting only 2.3. Remember that this is the index that had been posting negative numbers in 7 of the last 8 months, so this turnaround was a big deal and a very positive development. The positive feeling was short lived on Wall Street, however, as the University of Michigan came out with its Consumer Sentiment Index at the same time and showed that sentiment in the US has decreased since the final reading of March. Maybe everyone in the US is just a little unhappy about having to pay the taxes they owe for 2015!

 

This week is a slower week than normal for economic news releases with only one release that has the potential of moving the markets on the day it is released. The markets in general will be much more focused on earnings season, as discussed above:

 

Date Release Release Range Market Expectation
4/18/2016 NAHB Housing Market Index April 2016 59.00
4/19/2016 Building Permits March 2016 1200K
4/19/2016 Housing Starts March 2016 1170K
4/20/2016 Existing Home Sales March 2016 5.30M
4/21/2016 Initial Claims Previous Week 263K
4/21/2016 Continuing Claims Previous Week 2,171K
4/21/2016 Philadelphia Fed April 2016 9.9

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

 

This week starts off on Monday with the release of the NAHB housing market index for the month of April with expectations of a reading of 59 being seen, which would mean that the US housing prices are growing, but not growing as fast as they had been a year ago. On Tuesday, two more housing related figures are released, those being building permits and housing starts, with more than 1 million units expected on both indicators. On Wednesday, existing home sales for the month of March round out the housing figures for the week. In aggregate, if we get all positive figures from the housing data it would be seen as bullish for the US housing markets and potentially very positive for the home building companies. On Thursday the standard weekly unemployment related figures are set to be released with little change expected over the figures seen last week. Later on Thursday we will see if the Empire Manufacturing index figure from last week was a single time event or if there is more to the recovery that was seen in New York, as the Philadelphia Fed releases its latest business conditions index, in which manufacturing data for the region is also provided. It also looks like it is a slow week for Fed officials giving speeches as there are only three scheduled speeches this week, so that should have very little impact on the markets as well. Earnings will be the driving force behind the markets for the majority of this week.

 

Interesting Fact — Infamous Sixteen Impeachments in the US

 

Since 1797 the House of Representatives has impeached sixteen federal officials. These include two presidents, a cabinet member, a senator, a justice of the Supreme Court, and eleven federal judges. Of those, the Senate has convicted and removed seven, all of them judges. Not included in this list are the office holders who have resigned rather than face impeachment, most notably, President Richard M. Nixon.

 

Source: “A Short History of Impeachment” Borgna Brunner

For a PDF version of the below commentary please see my PDF Page here http://wp.me/Ppr8Z-23

Commentary quick take:

 

  • Market statistics:
    • US markets moved lower last week
    • Decline last week was only the second weekly decline in the last two months
    • Volume remains low in the downward movement
    • VIX increased by more than 17 percent last week

 

  • Interesting Federal Reserve Chairperson panel discussion
    • Chair Yellen and past chairs Bernanke, Volker and Greenspan
    • Bubble economy was a hot topic of the session
    • Chair Yellen continued to stand by the decision back in December 2015, when the Fed increased rates
    • Kept options open for future meetings and when interest rates will be increased again

 

  • Earnings season for the first quarter of 2016 is just about to start
    • Alcoa kicks things off this quarter with earnings being released on Monday
    • Financials and big banks make up the majority of the well-known companies releasing earnings this week
    • Expectations for earnings being reported are very low

 

  • Oil moved higher last week, ahead of the OPEC meeting on April 17th
    • Negative correlation between US financial market and oil persisted
    • Oil reserves in the US were shown to have declined meaningfully

 

  • Japan continues to struggle to find stable economic footing

 

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

 

  • Economic news releases:
    • Slow week last week with all releases coming in very close to expectations
    • Big week this week for inflation indicators
    • Retail sales could have a noticeable impact on the markets this week

 

  • This week for the markets:
    • Earnings speculation will be the main topic this week
    • OPEC meeting on April 17th and the potential effect on oil prices

 

  • Interesting Fact: Amsterdam is built entirely on poles


Technical market review: Last week saw the three main US indexes move down slightly, reversing the trend that has been in place for the past two months as the markets rallied on the rise of the price of oil. Last week was only the second week in the last eight that saw all three of the markets move lower. The charts below show each of the three major indexes, plus the VIX, drawn with green lines. The red lines on the three major indexes depict the closest resistance levels the indexes may hit in the coming trading weeks, as represented by points that have been tested on each index several times in the last 6 months. For the VIX, the red line remains the rolling 52-week average level of the VIX.

4 charts combined 4-11-16

From a technical perspective very little changed last week. All three indexes failed to break above their closest technical resistance levels, but also failed to move down enough to say they broke down in a meaningful way. The NASDAQ (lower left pane above) remains the weakest of the three indexes as it has now bounced twice off its nearest resistance level. Both the S&P 500 (upper left pane above) and the Dow (upper right pane above) are tied in terms of technical strength.

 

One aspect of the recent run-up in the markets that keeps coming up in the media is the rarity of the “V” shaped recovery we have seen in the markets. It is true that it is rare for major financial markets to go from a downward trend to an upward trend at a single point in time. However, with the price of oil being the catalyst for the market decline going into February and oil reversing course due to an OPEC announcement, it is not as difficult to understand the shape of the market recovery. But with oil being the driving force behind the recent market movement, it could lead to increased volatility in the near term if oil prices turn around yet again and start to move back down. We could get some clarity about the future movement of oil prices later this week as an OPEC meeting takes place on the 17th, at which the participants are supposed to hammer out the details of the oil production “freeze,” which when announced back in February started the market rally. If we see oil prices move back down below $30 per barrel it is likely the financial markets will push lower. But between the current price of about $42 per barrel and something in the low $30’s, oil prices could actually be a positive for the economy as consumers in theory have more money to spend on other goods and services as they are spending less to fill up their vehicles with gas. Additionally, companies reliant on shipping parts and products nationally and internationally will theoretically have lower costs and thus have more to allocate to employees or capital expenditures.

 

US news impacting the financial markets: Potential actions by the Federal Reserve and the timing of those actions, in addition to the first quarter earnings season, dominated the US media impacting the financial markets last week. On Thursday last week there was an unprecedented event in New York City as the current chair of the Federal Reserve was joined by the three immediate past chairs of the Federal Reserve who are still alive. The event was the inaugural event for the Paul A. Volcker Distinguished Speaker Program and was held at the International House of New York. It was moderated by Fareed Zakaria. The title of the session was “Decision making at the Federal Reserve,” and while there was no new information about the timing of the next increase in the Fed funds rate by Chair Yellen, it was very interesting to hear the various Fed leaders’ thoughts on several topics. The topic that Wall Street seemed to take the most interest in was the question of whether the US economy is currently inflating a bubble with the ultra-low interest rate environment extending for such a long period of time. The answers from the Fed chairs were unanimous that there was little chance of a bubble inflating due to the low interest rates. Chair Yellen was the most eloquent in her answer and outlined much in the same fashion as she did two weeks ago at the New York Economic Club her reasoning behind where she thinks the US economy is currently. She continued to say that the Fed will be cautious in its approach to increasing rates further. Chair Bernanke took an interesting question about if a recession were to occur now, would the Fed have the tools it needs to combat the situation given that in past recessions the Fed has historically lowered interest rates by 3.5 percent, something that obviously cannot be done now with rates at only 0.25 to 0.5 percent. He concluded that the Fed has many tools in its toolbox and that lower interest rates is just one way the Fed can have an impact on an economy that is experiencing a recession. The panel wrapped up with a short discussion about foreign economies and the strength of the US dollar. None of the panel members thought the US dollar was under any threat in the near term to losing the reserve currency status to the Chinese Yuan, and they thought that in general the US economy was still one of the best economies in the world and that it would be for the foreseeable future. When the markets opened on Friday there was almost no change in the expected time frame for the Fed increasing interest rates, with only a 3 percent chance of rates being increased at the April meeting of the FOMC. Looking further out, there are still only two increases anticipated during 2016, or less. The other major US news that had an impact on the financial markets last week was the upcoming earnings season for the first quarter of 2016.

 

First quarter 2016 earnings season officially kicks off today after the market closes with Alcoa releasing its earnings report. With Alcoa being a very large multinational aluminum company, it has been dubbed the company that officially kicks off earnings every quarter. One thought that is common on Wall Street is that if Alcoa beats earnings estimates then the quarter’s results for the overall markets will likely be better than expected and vice versa if it falls short of expectations. Aluminum touches so many different industries both here in the US and around the world that the company has a good feel for a wide variety of industrial companies based on shipments made during the quarter and on orders placed for future shipments.

 

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

 

Alcoa Citigroup Kinder Morgan
Bank of America CSX Progressive
BlackRock Delta Air Lines Reynolds American
Charles Schwab JPMorgan Chase Wells Fargo

 

As mentioned above, Alcoa will be very closely watched for the overall direction of earnings season, but a few of the large financial institutions may have more of a noticeable impact on the markets this week. With JP Morgan, Bank of America, Wells Fargo and Citigroup all releasing earnings during the same week, and in most cases on the same day, the markets could get very jittery if earnings come in below expectations. Expectations for earnings overall this quarter are very low, with energy of course leading the way downward as oil prices remained very depressed for much of the first quarter. It is expected that earnings on the S&P 500 will have declined in total dollar terms on a quarter over quarter basis for the fourth consecutive quarter with Energy being blamed for the majority of the decline. With such a low bar having been set for the quarter, it brings in an interesting phenomena of companies actually beating expectations and yet still seeing their stock prices decline due to lowered outlooks for 2016 and uncertainty in general moving forward. This type of movement could also make it harder for the Fed to increasing rates at any of the next three meetings as market volatility is now one of the factors chair Yellen has singled out that she is watching.

 

Global news impacting the markets: Japan, Europe and Oil were all global news stories that last week had an impact on global equity markets. In Japan, the government and the Bank of Japan (BOJ) just can’t seem to catch a break from the international and national investing community. In an article on Bloomberg last week the authors outlined what has been happening in Japan as investors seem to be losing faith in Abenomics saving the day and turning around the Japanese economy, which can arguably be said has been stuck in neutral for the last 25 years. According to the article, over the past 13 weeks Japan has seen $46 billion pulled from its financial markets as the risks of massive economic failure increase. Negative interest rates don’t seem to be doing much, other stimulus efforts by the BOJ don’t seem to be working and the value of the Yen has been sky rocketing, making exports all that much more expensive to foreign buyers and has been hurting exporters in Japan. The chart from Bloomberg of the US dollar versus the Yen is shown to the right and as you can see the Yen has increased in value versus the US dollar, moving from 123 Yen per dollar down to 108 Yen per dollar in just four and a half months. This is an opposite movement from what the BOJ has been trying to accomplish and shows that its actions thus far have been well intentioned, but not very effective. With Japan being the second largest economy in the world behind the US, trouble in Japan can easily spill over into other countries within the region. Another region that looks to be headed for a rocky few months is Europe.

Yen 4-11-16

Last week I mentioned that Greece is once again coming up against a deadline to get a deal worked on to secure the next tranche of its bailout funds from the IMF and other creditors. That deal has so far not materialized as pension and tax reforms are once again the sticking points Greece does not want to give into and yet the creditors are demanding. The Netherlands got into the mix last week as the country held a referendum vote that rejected a trade deal with Ukraine. While it is unlikely that the single country voting against a trade deal will stop Ukraine from integrating further with the European Union, it does raise some questions about the future of the EU as one cohesive unit and it comes at a very interesting time for the EU with the potential Brexit on the horizon. It still looks too early to call which way the referendum vote in the UK will go, but there is at least still a chance that the UK will break off from the rest of the EU and become much less integrated with the organization. With this chance comes uncertainty and uncertainty can drive markets, so the closer we get to the vote in the UK in June the more volatility I expect we will see in the European financial markets. Oil was the final major global news story that impacted markets last week as the upcoming OPEC meeting seems to be the focal point of the media.

 

OPEC will hold a meeting on April 17th in Doha to discuss production and the price of oil. The main topic will likely be the “freeze,” which was reported back in the middle of February and started oil moving higher along with the global financial markets. This is the meeting that the details of a “freeze” should be hammered out and yet it does not look like this will be the case as Iran has not even confirmed if it will be attending the meeting. Iran’s absence would be a problem since Saudi Arabia has announced it will agree to the freeze only if Iran agrees to it. So far, Iran has said it sounds like a good idea for OPEC to undertake, but that it will not be taking part in the agreement. From the Iranians’ standpoint (religiously, the country is opposed to the ruling party in Saudi Arabia), why would they want to lock into an agreement that would keep production at the level it was in January when they were still under international sanctions and not producing much oil for export? They would not want to do this at all. Plus, despite talks of a freeze, the latest numbers on oil production show that the main oil producers that are part of OPEC, as well as Russia, increased production during February above the so called freeze level. If an agreement is not reached on Sunday at the meeting we will likely see oil prices nose dive as the global supply and demand of oil has not significantly changed over the past two months, yet the prices of oil have increased, all based on this deal being worked out.

 

Market Performance: Last week saw all three of the major US indexes move lower to start the second quarter of 2016:

 

Index Change Volume
S&P 500 -1.21% Average
Dow -1.21% Below Average
NASDAQ -1.30% Below Average

 

Volume was average on the S&P 500, but below average on the other two indexes, meaning that participation in the markets to the downside was lower than it has been over the last year. The trading last week on the major indexes looked like consolidation trading more than anything else, meaning that investors and money managers were making small adjustments in their positions throughout the week rather than making large changes to positions.

 

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

 

Top 5 Sectors Change Bottom 5 Sectors Change
Oil & Gas Exploration 3.87% Broker Dealers -6.52%
Pharmaceuticals 3.66% Financial Services -3.53%
Biotechnology 3.37% Regional Banks -3.29%
Natural Resources 2.49% Insurance -3.27%
Energy 2.13% Financials -2.78%

With oil up nearly 7.5 percent over the course of the past week it was not surprising to see that Oil and Gas Exploration was the top performing sector of the markets last week. Pharmaceuticals and Biotechnology made up positions two and three of the top performing sectors last week, thanks in part to Valeant Pharmaceuticals gaining more than 20 percent during the week after declining more than 70 percent two weeks ago after issuing a horrible earnings report for the fourth quarter of 2015 and lowering its outlook for 2016, thanks to much slower than anticipated sales. Financials and financial related companies made up the entire bottom 5 performing sectors of the markets last week as the low interest rate environment here in the US, combined with weakness in Europe and Asia as well as increased regulation globally, has hurt them on nearly all fronts. It will be very interesting this week to see how the first quarter of 2016 went for the big banks as they are the leadoff sector for earnings season.

Fixed income markets were all positive last week as investors continue to think the Fed will be very slow to increase interest rates this year given the economic uncertainty globally:

Fixed Income Change
Long (20+ years) 1.02%
Middle (7-10 years) 0.66%
Short (less than 1 year) 0.05%
TIPS 0.11%

Currency trading volume was higher than usual last week with the Yen moving by more than 3 percent and currency traders around the world having to adjust to the movement. The US dollar decreased by 0.45 percent against a basket of foreign currencies, as speculators continue to think that the Fed will have a difficult time increasing interest rates more than twice during 2016. The best performance of the global currencies last week was the Japanese Yen as it gained 3.20 percent against the value of the US dollar. The weakest of the major global currencies last week was the Australian Dollar as it declined by 1.61 percent against the value of the US dollar. Weakness in the Australian dollar last week seemed to be related to the falling copper prices as Copper is one of the country’s main exports.

Commodities were mixed over the course of the previous week, as Oil jumped higher, while Copper and Agriculture moved lower:

Metals Change Commodities Change
Gold 1.28% Oil 7.50%
Silver 1.95% Livestock 0.84%
Copper -4.43% Grains -0.16%
Agriculture -0.98%

The overall Goldman Sachs Commodity Index advanced by 3.26 percent last week, as oil ran up by 7.5 percent ahead of this week’s OPEC meeting and on hopes of securing a deal to freeze oil production as well as a large decline in oil inventories being reported here in the US. The major metals were mixed last week with Gold and Silver turning in positive returns of 1.28 and 1.95 percent respectively, while Copper pushed downward by 4.43 percent for the week. Copper’s two week decline is now more than 7.5 percent thanks to slowing demand out of China. Soft commodities were mixed last week with Livestock gaining 0.84 percent, while Grains declined 0.16 percent and Agriculture overall moved lower by 0.98 percent.

Last week most of the global equity indexes moved lower, while moving in lock step with the US and Chinese equity markets. The best performing index outside of the US last week was found in Switzerland, which turned in a gain of 1.7 percent. The increase in the Swiss market was attributed to the strength of its currency relative to the Euro and the British pound and to the Panama Papers scandal, which took the spot light off of the banking system in Switzerland and focused on the people moving money through Panama to skirt taxes around the world. The worst performing index last week was found in Mexico and was the Bolsa index, which turned in a loss of 2.6 percent for the week.

The single digit, double digit trend that we had been seeing for the past 13 weeks on the VIX finally came to an end last week as we saw a second week in a row with a double digit move, breaking the pattern. The VIX gained some ground last week in what turned out to be a very volatile trading week for the VIX. In total, it gained 17.25 percent for the week, ending the week at 15.36. The current reading of 15.36 implies that a move of 4.43 percent is likely to occur over the next 30 days. As always, the direction of the move is unknown. There was not really a single specific catalyst for the VIX movement last week as investors seemed to be reassessing the risk in the markets and coming to the conclusion that the fear gauge was too low.

For the trading week ending on 4/8/2016, returns in the hybrid hypothetical models* (net of a 1% annual management fee) were as follows:

Last Week 2016 YTD Since 6/30/2015
Aggressive Model -0.91 % 1.31 % 5.63 %
Aggressive Benchmark -0.50 % -1.21 % -6.24 %
Growth Model -0.82 % 1.37 % 4.73 %
Growth Benchmark -0.38  % -0.87 % -4.72  %
Moderate Model -0.71 % 1.43 % 4.18 %
Moderate Benchmark -0.28 % -0.57 % -3.26 %
Income Model -0.71 % 2.11 % 4.77 %
Income Benchmark -0.13 % -0.22 % -1.51 %
S&P 500 -1.21 % 0.18 % -0.75 %

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

 

There were no changes to the hybrid models over the course of the previous week. In general the hybrid models remain almost fully invested, but with the investments currently in the models being low volatility focused. The holdings that are in the models tend to perform well in times of uncertainty, but are susceptible to underperformance in times of risk-on trading. Investments that we are closely watching and would like to purchase at some time in the future include Oil and Gas, Energy and Healthcare and to fill out the current partial positions in Transportation and Technology.

 

Economic Release Calendar: Last week was a very slow week for economic news releases as we had only 5 releases, none of which significantly beat or fell short of market expectations:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Neutral 4/5/2016 ISM Services March 2016 54.50 54.00
Neutral 4/6/2016 FOMC Minutes Previous Meeting N/A N/A
Neutral 4/7/2016 Continuing Claims Previous Week 2191K 2173K
Neutral 4/7/2016 Initial Claims Previous Week 267K 270K
Neutral 4/7/2016 Consumer Credit February 2016 $17.3B $14.40B

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

 

Last week the economic news releases started on Tuesday with the release of the Services side of the ISM index. Much like the overall ISM index two weeks ago the service index came in just slightly better than was anticipated and was a non-market moving release. On Wednesday the FOMC meeting minutes from the previous meeting were released and held no new or meaningful information as the Fed still is saying and looking like it wants to increase rates twice during 2016 with a quarter of a point increase expected each time the rate is raised. On Thursday the standard weekly unemployment related figures were released with both figures coming in very close to expectations and having no noticeable impact on the overall markets. Wrapping up the week last week was the release of the consumer credit report for the month of February, which came in better than expected, but much of that is due to people refinancing home loans in advance of higher interest rates later this year.

 

This week is a typical week in terms of the number of economic news releases, but there are a few releases that could impact the Fed’s thinking at the upcoming FOMC meeting that will likely garner a lot more attention than normal (highlighted in green below):

 

Date Release Release Range Market Expectation
4/13/2016 PPI March 2016 0.30%
4/13/2016 Core PPI March 2016 0.20%
4/13/2016 Retail Sales March 2016 0.10%
4/13/2016 Retail Sales ex-auto March 2016 0.40%
4/14/2016 CPI March 2016 0.30%
4/14/2016 Core CPI March 2016 0.20%
4/14/2016 Initial Claims Previous Week 268K
4/14/2016 Continuing Claims Previous Week NA
4/15/2016 Empire Manufacturing April 2016 2.3
4/15/2016 University of Michigan Consumer Sentiment April 2016 92

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

 

This week the economic news releases kick off on Wednesday with the release of the Producer Price Index (PPI) for the month of March. Overall prices are expected to have increased at the producer level by 0.3 percent, while core PPI is expected to show an even smaller increase, gaining only 0.2 percent. Both of these figures, if they come in as expected, would suggest that inflation is not currently a problem in the US economy and that the Fed is fine with keeping these low rates in place. Also released on Wednesday are the latest retail sales figures for the month of March, which are expected to be very close to zero, registering growth of only 0.1 percent during the month. Retail sales need to pick up the pace if the US economy is going to continue to move forward in this slow growth environment. On Thursday the Consumer Price Index (CPI) will be released and, much like the PPI earlier in the week, expectations are for a very low rate of inflation being shown during the month of March. If it comes to fruition, it will only add to the thought that the Fed can afford to keep rates low without the fear of runaway inflation running rampant in the economy. Also released on Thursday are the standard weekly unemployment related figures with both figures expected to be little changed over last week’s numbers. These releases should not have a notable impact on the overall markets. On Friday the Empire Manufacturing index is set to be released, with expectation that the index will make it two positive months in a row, indicating that manufacturing in the greater New York area picked up during the month of April. This could be a positive precursor for other manufacturing releases to come later during April. 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). Expectations are for little change over the end of March reading of 91, but any wide deviation from the expected 92 reading could see some marginal market reaction. In addition to the scheduled economic news releases this week there are also nine speeches being given by Fed officials and one by Treasury Secretary Jack Lew, which is somewhat unusual. The markets will likely pay casual attention to the speeches by the officials as they are unlikely to have much bearing on the upcoming Fed decisions, decisions that Chair Yellen has outlined very eloquently over the past two weeks.

 

Interesting Fact Amsterdam is built entirely on poles

 

Because Amsterdam’s soil consists of a thick layer of fen and clay, all buildings are built on wooden poles that are fixed in a sandy layer that is 11 meters deep on average. The Royal Palace at Dam Square is built on no less than 13,659 wooden poles. Newer poles are made of concrete and steel.

 

Source: www.visitholland.nl and tedx.amsterdam

For a PDF version of my First Quarter 2016 in review please go to my PDF page which can be found here http://wp.me/Ppr8Z-23

Roller coaster

First Quarter 2016 in Review: Jeff Parker’s classic Wall Street rollercoaster cartoon is the best way to describe the volatile ride seen in the US financial markets over the course of the first quarter of 2016. The year started with the worst 5 trading days ever for the Dow, looking all of the way back to 1886, while volatility spiked with 6 of the 19 trading days in January seeing swings greater than 400 points for the Dow. All of this was in route to what turned out to be one of the worst January performances for each of the three major US indexes and declines in the markets continued. The US markets slid through the first part of February, mounting a turnaround starting on Friday, February 12th. By then, the US markets had declined by more than 10 percent since the start of the year. The turnaround was primarily driven by a turn in the price of oil, with oil finally increasing after having fallen consistently since June of 2014. With oil prices finally turning the corner and moving upward, the US markets rallied to the end of the quarter with the Dow posting a small gain of 1.49% for the quarter, while the S&P 500 turned in a gain of 0.77 percent and the NASDAQ posted a decline of 2.75 percent. What was driving the volatility we saw during the first quarter of 2016? Many different aspects of both the US and global economy were driving the volatility seen throughout the quarter.

 

Oil was the primary driver behind much of the volatility seen in the global markets during the first quarter of 2016. Oil prices declining had been a trend for more than 18 months leading up to the first quarter of this year, but seeing prices break meaningfully below $40 per barrel and then below $30 per barrel had many economists, analysts and investors alike on edge. Fears over massive defaults in the Energy industry as well as mass layoffs and slowing oil production around the world had many knock-on effects that negatively impacted the markets. All of this was happening at the same time that the oversupply of oil globally was growing as the demand for oil from China was shown to be slowing. Oil did turn higher in mid-February, however, as OPEC announced a freeze in production, which was immediately called into question by outsiders. The freeze was put in place after OPEC had pumped near record highs on a monthly basis that appeared to be nothing more than a ploy to try to stop Iran from bringing more oil to market after just having sanctions lifted that had prohibited the country from sending large amounts of oil to the international community for more than a decade. Whatever the true motivation behind the talks around freezing oil output, the tactic worked as oil prices rebounded back over $40 per barrel in a little more than a month. But the damage to the global economy may have already been done.

 

During the first quarter the outlooks for global expansion as well as the expansion of various key countries around the world were lowered by various economic reporting companies and agencies. The World Bank cut the global outlook for 2016 global GDP growth from 3.3 percent in June of 2015 down to 2.9 percent in January of 2016. US GDP growth expectations were cut from 2.8 percent down to 2.7 percent, in line with almost all of the developed and developing countries. Russia was the hardest hit in the report, going from expected growth of 0.7 percent in 2016 down to an expected contraction of 0.7 percent. India was the lone bright spot in the World Bank’s report as the country is now expected to grow at a 7.8 percent rate versus the previously expected 7.3 percent rate. Lowered expectations during the quarter were also reiterated by the International Monetary Fund (IMF), European Central Bank (ECB) and the US Federal Reserve. The main reasons for the decline in expectations included low oil prices, the strong US dollar, the slowing of China, corporate earnings and uncertainty over future central bank actions.

 

Central banks around the world played a pivotal role in the markets during the first quarter. They always play a pivotal role, but this quarter their actions and thoughts seemed to be even more pronounced than usual. Up first was the inaction taken by US Fed chairwoman Janet Yellen, who decided to hold off on increasing interest rates at each of the FOMC meetings held during the quarter. She also lowered expectations for the number of rate hikes from 4 going into the year down to just two hikes during 2016. Reasons she gave for not increasing rates during the quarter included global market volatility and other central banks taking actions that were the opposite of increasing rates. One such central bank was the ECB, which cut interest rates during the quarter even further into negative territory and increased various bond buying programs, among several actions taken by the bank to try to spur inflation and growth within the Euro zone. Negative interest rates were also an interesting by product of the current global situation as NIRP (negative interest rate policies) have now been adopted by several central banks around the world with, according to JP Morgan, 30 to 40 percent of all sovereign debt around the world trading with negative interest rates attached. This is something that has not been seen prior to now and it will be very interesting to see how it plays out in the future. With all of this uncertainty around the world from the central bankers, it was not surprising to see that the value of the US dollar remained strong relative to many other currencies around the world, something that has been playing out now for the last 18 months.

 

China was a key player in the volatility during the first quarter of 2016 as the government continued to try to cope with financial market movements that were very difficult to predict. Throughout the quarter various economic indicators, both from within and without China, showed that the economy in China is slowing down. Exports from China declined the most in almost a decade, while slowing imports to China of natural resources helped push many commodities to multiple year lows. Talks of a hard landing in China during the first part of the quarter spurred anxious trading around the world on a seemingly daily basis. Then when the government in China took actions or made simple moves through the People’s Bank of China, the global markets would rally. All of this is occurring as the government in China is trying to steer the economy from an export driven economy into an internal consumption economy, a task that will take at least several decades given the size of the overall economy. Toward the end of the first quarter it seemed the markets had become slightly disconnected from the happenings in China as they seemed to be taking a wait-and-see approach to how everything would turn out for China. The wait-and-see approach also seems to be playing out in the final reason for the volatility in the markets during the first quarter of 2016: corporate earnings.

 

Corporate earnings released during the first quarter of 2016 were for the fourth quarter of 2015 and in general they were pretty weak. Expectations for the fourth quarter going into earrings season was that low oil prices would have really hurt the Energy sector, while a strong US dollar during the fourth quarter would have hit many of the multinational corporations based here in the US. Both expectations came to fruition, as only 69 percent of companies that reported earnings for the fourth quarter met or beat expectations, while 31 percent fell short. The numbers looked even worse when looking at revenues, with only 47 percent of companies meeting or beating expectations on revenues, while 53 percent fell short. Slowing manufacturing, consumer confidence and retail sales declines were blamed for the weak corporate earnings in addition to the low price of oil and strong US dollar. Going forward, the first quarter of 2016 earnings are expected to be even lower than the fourth quarter of 2015, signaling the fourth consecutive year-over-year quarterly decline in earnings for the S&P 500, something that has not happened since early 2009.

 

Looking to the future: With all that happened during the first quarter of 2016 it is easy to see why it felt like a roller coaster ride for investors, but are we in for the same volatility in the markets going forward? It is unlikely that we will see the same level of volatility experienced during the first quarter of 2016. That is not to say that it will be smooth sailing as there are many facets of the markets and global economy that could provide some bumps in the next quarter or two. One such potential bump is heightened uncertainty over the Presidential race here in the US as it could have large ramifications for the US economy as well as the global economy. Right now it looks like Hillary Clinton will likely get the Democratic nomination, while Donald Trump is leading the Republican field, but likely to fall short of the needed number of delegates to secure the nomination at the convention on the first ballot vote. This adds nothing but uncertainty to the political landscape for the markets. Uncertainty, as you well know, is typically not positive for the markets, but we are unlikely to see much of an uptick in volatility from the political process until late in the second quarter and going into the third. More pertinent to the markets in the immediate future are the actions of central banks as they grapple with various stages of growth or decline around the world in an attempt to help their specific regions or countries.

 

No bigger decision is out there in central bank land than that of the US Federal Reserve, which has been on a cusp of increasing interest rates now for the past few months. While some central banks have adopted a NIRP (negative interest rate policy), the Fed seems to be on the path to increasing rates here in the US at least two times during 2016. The odds of an increase during the second quarter remain pretty low, but with the Fed being data dependent and very close to its thresholds and targets it could conceivably increase rates at any of the meetings during the remainder of 2016. With such uncertainty over the timing of rate increases, as we approach any of the future meeting dates the markets will likely see increased volatility. Other central banks that could realistically have an impact on the global market during the next few quarters would be the ECB and the People’s Bank of China. The ECB seemed to throw everything it has in its tool box at the current problem, but that is not to say that it is out of tools. It could always make something else up as the bank is already in uncharted water. In China the situation is a bit more interesting as the government is trying to implement the first stages of a very long-term plan to get the economy off of the dependence of others to become more self-sufficient. This is being done through a variety of policy changes and central bank actions, but the catch is that foreign investors control large amounts of investments in China, either directly or through Hong Kong listed companies, and these investors are much less interested in long term changes for China and more interested in short term gratifications from their investments. Small policy shifts that are positive for the direction that China wants to move in can lead easily to massive foreign sells punishing Chinese listed companies around the world. Thus, the government is somewhat stuck. It will likely figure out how to press through what it would like to see done even if it is at the expense of foreign investors, but this could lead to a lot more volatility in a market that is already one of the most volatile and violent in the world. Oil is the final wild card that could move the markets in the near future. The rally seen over the last month and a half appears to be stalling out and potentially even reversing course as oil moves back down. If a decline from current levels were to materialize it would be conceivable that the global financial markets would decline with the price of oil as they did at the start of the year. Uncertainty seems to be everywhere and, with it, many opportunities for managers and investors who are positioned to and have the ability to take advantage of situations as they arise.

 

Have a great second quarter of 2016

 

Peter Johnson

 


 

Time for the First Quarter Numbers:

 

The following is a numerical representation of the first quarter of 2016. The three major US indexes and the VIX turned in performance as follows:

 

Index 1st Quarter 2016
Dow 1.49 %
S&P 500 0.77 %
NASDAQ -2.75 %
VIX -23.39 %

 

The VIX was one of the main stories when looking at the numbers from the first quarter of 2016 as the VIX at one point was up nearly 55 percent, only to decline by more than 50 percent between the middle of February and the end of the quarter. All three of the major US indexes declined intra-quarter by more than 10 percent.

 

Globally, there were a handful of countries that turned in positive performance for the first quarter of 2016. The best performances among the upward moving markets were as follows:

 

Index 1st Quarter 2016
Thailand 8.7%
Mexico 7.2%
Indonesia 5.4%

 

Emerging markets with a bias toward south eastern Asian countries provided the highest number of positive returns of the major indexes during the quarter. Much of the movement in the region was gains for local economies as China stumbled during the quarter, as export driven businesses seem to be looking for places to operate other than China, while staying in the region to capitalize on the very low cost of wages and relatively high production numbers that can be achieved.

 

It was pretty easy to guess two of the bottom three performing indexes during the first quarter, but the worst performing index was a surprise:

 

Index 1st Quarter 2016
Italy -17.0%
Japan -15.1%
China -15.0%

 

 

Italy snuck in and took the top spot in terms of worst performing index during the quarter thanks in large part to uncertainty over actions taken by the ECB actually working and the large amount of debt and fixed costs the Italian economy bears. It was not at all surprising to see how poorly Japan performed during the quarter as the movements in the Yen hurt the local economy at the expense of trying to increase exports. China, as mentioned numerous times in the main commentary, had a very wild quarter with its “A” shares markets as foreign investors moved into and out of many positions as the government made various financial announcements.

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 2016:

 

Style /  Market Cap Value Blend Growth
Large Cap 0.94% 0.61% 0.31%
Mid Cap 3.26% 1.75% 0.24%
Small Cap 1.10% -1.92% -4.90%

The biases of the markets during the first quarter were very clear when looking at the style box performance. Value was a much better side of the table to be invested in when compared to growth at all three different market caps. Mid-caps turned in the best performance in terms of market cap while both large and small caps lagged behind in almost all of the three styles. The differences seemed to be very pronounced this past quarter in the various boxes, thanks in large part to the decline in energy, financials, biotechnology and healthcare, which make up a large part of the small and large cap space. Midcaps on the other hand have a lot of middle of the road companies in the consumer staples and discretionary sectors, which performed well during the quarter.

 

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

Sector Change
Gold 16.13%
Utilities 15.45%
Infrastructure 8.76%
Telecommunications 7.64%
Transportation 5.96%

 

All five of the top sectors of the markets over the first quarter were defensive in nature and generally experienced less volatility than the overall markets. Gold is the safe haven asset investors like to flee to when interest rates are low and central banks are essentially printing money, which was the case in most of the world during the quarter. Utilities had a great quarter despite the volatility of oil prices as many utility companies take very little direct exposure to the price of commodities and they pay very strong and consistent dividends. Transportation made the list this quarter, thanks to the low average price of oil as fuel is the largest input cost to many transportation companies and with oil prices down, fuel prices were also lower than they have been for many years.

 

The bottom-performing sectors for the first quarter of 2016 were as follows:

 

Sector Change
Biotechnology -22.87%
Pharmaceuticals -15.09%
Financial Services -9.44%
Broker Dealers -9.22%
Financials -7.13%

 

 

It seemed that anything related to the drug companies really had a difficult quarter during the first quarter with companies such a Valiant (a darling company for the hedge fund industry) falling by more than 70 percent during the quarter. Political fears over future price controls on pharmaceuticals also played into the movements of the sector in general during the quarter. Financial related companies rounded out the bottom five sectors for the quarter, thanks to the negative and very low interest rates as well as lower profits on trading desks, both for the fixed income and equity sides of the markets. Increased cost of regulations to comply with some of the laws passed in the aftermath of the Great Recession also hit the bottom line of some of the major financial institutions.

 

Commodities were mixed throughout the first quarter as some assets declined, while others increased:

 

Commodities Change
GSCI Commodity Index -3.09%
Gold 15.95%
Silver 11.30%
Copper 2.60%
Oil -11.82%

 

Overall the Goldman Sachs Commodity Index declined by a little more than 3 percent, but that is primarily due to the decline in the price of oil. Precious metals turned in a good quarter thanks in large part to the safety of physical commodities such as Gold and Silver, both of which were up more than 10 percent. The more industrially used metal, Copper, increased only 2.6 percent for the quarter, thanks to a rally in the second half of the quarter following a steep decline in prices due to lower perceived demand from China to start the quarter.

 

The fixed income market was positive across the board, which was very unexpected and shows the difficulty of the Fed upcoming rate decisions:

 

Fixed Income Change
20+ Year Treasuries 8.73%
10-20 Year Treasuries 5.77%
7-10 Year Treasuries 4.80%
3-7 Year Treasuries 2.96%
1-3 Year Treasuries 0.90%
Short (less than 1 year) 0.14%
TIPS 4.52%

 

Going into this year the fixed income market was anticipated to have a difficult year because interest rates would be going up as the Fed increased rates. However, with the Fed’s capitulation on how much it would raise rates in 2016 and how many times it would do it, fixed income during the first quarter had a great quarter. This performance, however, does not change the longer term prospects for fixed income, which is coming out of a 30-plus year bull market of rates moving lower. Interest rates will move up in general over the medium and longer term time horizon and when rates move up, fixed income prices move lower and losses will mount at very fast speeds.

For a PDF version of the below Weekly Commentary please click here http://wp.me/Ppr8Z-23

Commentary quick take:

 

  • Market statistics:
    • US markets moved higher last week to finish out the first quarter
    • Two of the three major US indexes made it to positive performance for Q1 2016
    • Volume last week was below average, signaling a general lack of participation in the market movements

 

  • Federal Reserve Chair Yellen gave an interesting speech
    • Overall sounded more dovish than expected
    • Outlined conditions and indicators she is looking at
    • Took control of the Fed situation
    • Proceed cautiously, with two rate hikes during 2016

 

  • Oil price and US market correlation has flipped
    • Negative correlation started last week

 

  • Oil moved lower last week, as breakdown in supply “freeze” looks likely

 

  • Greece may once again start to make negative headlines in the coming months

 

  • Hybrid investments strategy update:
    • Positive returns for the first quarter across all hybrid models
    • There were no changes last week in the models

 

  • Economic news releases:
    • Positive Manufacturing data came out of Chicago
    • Better than expected consumer confidence
    • Employment figures were mixed:
      • Unemployment rate increased
      • Payroll numbers were strong
      • Wages and participation rate both increased

 

  • This week for the markets:
    • Lead up to the official start of earnings season for the first quarter of 2016
    • Fed speculation
    • Oil movement

 

  • Interesting Fact: Just how big is Saudi Aramco?


Technical market review: As you can see from the charts below, last week saw a continuation of the market rally that has been taking place since the middle of February when oil turned around and moved higher. With the rally last week to end the month of March, two of the three major indexes here in the US managed to turn in a positive return for what turned out to be a very volatile first quarter of 2016. The charts below show each of the three major indexes, plus the VIX, drawn with green lines. This week I have redrawn two of the three red lines on the three major indexes, depicting the closest resistance levels the indexes may hit in the coming trading weeks, as represented by points that have been tested on each index several times in the last 6 months. The resistance level stayed the same for the NASDAQ, which has thus far failed to break above the previous resistance level, while the other two indexes made quick work of passing through their respective levels. For the VIX, the red line remains the rolling 52-week average level of the VIX.

4 charts combined 4-4-16

In terms of technical strength, there remains a tie for the strongest of the three major indexes with both the S&P 500 (upper left pane above) and the Dow (upper right pane above) both at almost exactly the same place. The NASDAQ remains the laggard, having more than 3 percent of a gap between itself and the other two indexes. But with how fast the NASDAQ moved last week, it is obviously a gap that can be overcome very quickly if a few select technology related sectors turn around, such as Pharmaceuticals and Biotechnology, both of which are heavily represented on the NASDAQ. The increase last week in the major indexes was done on light trading volume, despite the month of March and the first quarter of 2016 coming to a close during the week. This lack of volume was unusual, as discussed further in the market statistics section below. While the markets were moving higher last week, the VIX as expected was pushing lower, moving further and further below the 52-week rolling average level that we have seen on the fear gauge. This relationship between the VIX and the indexes has been the trend for the past month and a half and will likely continue to be the trend going forward.

 

US news impacting the financial markets: The US markets rallied on the back of Fed Chair Yellen’s speech, which she gave to the Economic Club of New York last Tuesday. The speech provided the market and investors alike with the most concrete look at how she thinks about the US economy and what she is weighing in determining when to increase rates again here in the US. In what some Fed watchers and economists are calling Chair Yellen’s best speech given during her time as the Chair of the Federal Reserve, Chair Yellen took a notably dovish tone. In an attempt to ease the nervousness of the markets Chair Yellen outlined a number of key points that she referred to as conditions she is watching for determining when to increase interest rates further. They include:

 

    • Foreign economies and markets need to see stability
    • Commodity prices (oil in particular) needs to stabilize
    • US housing sector needs to contribute more to economy
    • Inflation needs to pick up
    • US dollar needs to stop appreciating against other global currencies

 

While many people assumed these and other factors were what Chair Yellen was watching, having her explicitly say so seemed to put the markets at ease, even if it is difficult to define whether several of the factors are improving or not. For instance, when she mentioned foreign market volatility, this broadens the horizon for what she is watching by a lot because at any given time there is an economic crisis somewhere in the world that may or may not impact the US. Of course, everyone knows she was talking about China, Japan and Europe with this comment, but it does leave her a lot of wiggle room in her decision. Watching foreign markets is also a double edged sword because foreign markets like having US rates so low, so leading up to each Fed meeting in the future we could see an increase in volatility due to fears alone over higher rates in the US. In calling out oil prices she essentially hit two of her main points at the same time as the recent increase in inflation can be attributed to the increase in the price of oil that has occurred over the past month and a half. She is watching to see if the move in inflation “will prove durable” or not, as the price of oil will undoubtedly continue to trade in a very wide price range. It seemed she commented about the strength of the US dollar to talk down the currency, which had been moving sideways against most of the other global currencies for several months after its huge rally to end 2015. Her mention of the US dollar’s strength worked as the currency tumbled on Tuesday and gave up more than 1.5 percent against a basket of international currencies for the week. With all of the speaking and data points Chair Yellen put out there on Tuesday, did it change the prospects for rate hikes this year from the Fed? No. It still looks like we will see at most two rate hikes during 2016 and that the Fed will proceed very cautiously. As for the timing, according to the latest CME Fed watch numbers, the likelihood of a rate hike does not move above a 50 percent chance until the July 27th, 2016 meeting. If the Fed does roll out two hikes as it wants to, at least according to the CME it looks like both hikes will be in the second half of the year. Another very interesting aspect of the markets over the past week is the correlation between oil and the S&P 500.

 

Over the past several months the price of oil has really seemed to dictate the movement of the markets, meaning when oil prices have gone up the markets have gone up and when oil prices have moved down the markets have moved down. When digging into the numbers it is easy to see that there was indeed a high degree correlation between oil price movement and the broader market movements, as seen in an index like the S&P 500. The chart below shows the change in both oil prices (red line) and the S&P 500 (blue line) with both indexes starting at a value of 100 as of 12/31/2015:

Oil and Sand P chart 4-4-16

Looking roughly at the chart to the right you can see correlation (correlation meaning that both lines move in the same direction at the same time) between the lines. This holds true up until about two weeks ago when oil prices started to decline and the S&P 500 continued to push higher.

Oil Correlation 4-4-16

In fact, the chart to the right shows a line chart of the numerical value of the correlation between oil and the S&P 500. The interesting thing is that it recently turned into a negative number, meaning that as oil prices move down there is a higher chance of the S&P 500 moving higher than moving lower and the opposite is also true. The last time we saw this was briefly back at the start of the year. So what does this mean for the financial markets? It means that one of the main driving forces behind the recent market volatility may actually now be turning into a tail wind. Lower oil prices could once again mean less money spent at the gas pump, resulting in more money for consumers to be able to spend on other items. This, however, only works to a point and then the markets will become more and more fearful over the future of the energy industry here in the US and it will likely drag the markets down as it did earlier this year.

 

 

 

Global news impacting the markets: Global news last week was pretty slim as markets around the world seemed to be watching Chair Yellen as she spoke on Tuesday and then reacting to her statement. There were two story lines that made a few headlines that could impact the markets in the near term, those related to the oil production freeze by OPEC and those related to Greece. Back in February, Saudi Arabia and OPEC announced a grand idea of a production freeze to help slow down the increasing supply of oil into an already overflowing oil market around the world. It was not a cut in production that was agreed to, but rather a freeze in production at the January levels, which were some of the highest OPEC production levels they have ever managed to achieve. Iran immediately cried foul as the country had just had decades’ old international sanctions lifted and was just starting to get oil and production moving toward its previous normal levels from the 1990s. Fast forward to last week and now Saudi Arabia has made it clear that it will only comply with the production freeze if the Iranians do so as well. Iran has already said that it sounds like a great idea for OPEC, but to count Iran out until it is back at comfortable production levels. With the deal likely falling apart (it was never really together), it looks like production will once again be increasing out of the Middle East and will likely cause the price of oil around the world to decline. If this happens, the US and other global financial markets may rally for a little while on cheaper fuel costs, but ultimately, like earlier this year, falling oil prices will push the markets lower. In other news, a headline that has not been recycled for quite some time came up last week—another potential Greece default and subsequent kick out of the Eurozone.

 

Last week there was a leaked IMF call transcript that purports to show that IMF officials believe they get an upper hand in the negotiations with Greece if the negotiations drag on closer to the deadline for structural reforms required to secure further bailout funds from the IMF and other lenders. July is once again crunch time for Europe and Greece and we will likely once again witness the uncertainty over the future membership of Greece within the Eurozone. If a deal is not struck, Greece will once again face default, but much like the boy who cries wolf for fun, most of the global markets will likely pay little attention until “default” is actually said by the credit rating agencies. Even then, the market may not care this time around. It is interesting though that Greece will be a main topic of Europe, while at the same time a Brexit could be underway on the other side of the continent.

 

Market Performance: Last week saw all three of the major US indexes move higher as the indexes pushed to close out the first quarter on a high note:

 

Index Change Volume
NASDAQ 2.95% Below Average
S&P 500 1.81% Below Average
Dow 1.58% Below Average

 

Surprisingly, last week the volume for the three major US indexes was below average. Typically at the end of a quarter volume moves significantly higher than most weeks as investors and money managers alike adjust their positions for the new quarter. ETF and mutual funds that mimic indexes can also add to the volume if they have a quarterly rebalance schedule that forces them to buy and sell to look exactly like an index on the first day of each quarter. With such a strong move on low volume it looks as if the increase last week could fade away quickly if volume picks back up in the coming weeks. With the increase last week, both the S&P 500 and the Dow havae ended the year so far in positive territory, with the NASDAQ quickly converging on the gain/loss inflection point for the year.

 

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

 

Top 5 Sectors Change Bottom 5 Sectors Change
Biotechnology 5.02% Oil & Gas Exploration -1.18%
Telecommunications 4.88% Energy -1.07%
Medical Devices 3.82% Natural Resources -0.48%
Semiconductors 3.47% Transportation -0.47%
Real Estate 3.41% Regional Banks -0.03%

Biotechnology made it two weeks in a row last week in the top two performing sectors of the markets. Much of the move likely has to do with bottom fishing investors coming into the sector after perceiving it to be the most beat up sector of the markets so far during 2016. Telecommunications came in second place last week, continuing a trend that has made the sector one of the best performing sectors of the year. On the flip side, Oil and Gas Exploration, not surprisingly with the decline in oil prices last week, turned in the worst performance of any of the major sectors last week. Oil declining also drug down the Energy sector and Natural Resources rounded out the worst three performing sectors of the market for the week.

Fixed income markets were all positive last week after the statement by Fed Chair Yellen made it seem like the Fed could be slower on increasing rates than some of the other FOMC member speeches over the previous three weeks made it seem:

Fixed Income Change
Long (20+ years) 0.88%
Middle (7-10 years) 1.02%
Short (less than 1 year) 0.00%
TIPS 1.42%

Currency trading volume was higher than usual last week with the US dollar not being the benefactor of much of the trading. The US dollar decreased by 1.60 percent against a basket of foreign currencies, after Chair Yellen’s speech signaled that rates here in the US may be lower for longer this year and end the year at a lower point than initially thought. The best performance of the global currencies last week was the Swedish Krona as it gained 2.30 percent against the value of the US dollar. The weakest of the major global currencies last week was found in China and was the Chinese Renminbi as it declined by 0.41 percent against the value of the US dollar. It was interesting to me that even countries that are currently running negative interest rates saw their currency appreciate against the US dollar last week after Chair Yellen’s statement.

Commodities were mixed over the course of the previous week, as Gold moved higher, while all of the other commodities pushed lower:

Metals Change Commodities Change
Gold 0.52% Oil -7.26%
Silver -0.62% Livestock -1.89%
Copper -3.39% Grains -1.26%
Agriculture -1.44%

The overall Goldman Sachs Commodity Index declined by 3.43 percent last week, thanks to declines seen nearly across the board in all types of commodities. Oil declined by 7.26 percent last week as the deal to freeze oil production by OPEC looks like it is starting to fall apart as the Saudi’s are saying they will freeze production only if Iran does so as well. The major metals were mixed last week with Gold being the sole positive commodity in terms of performance last week, gaining 0.52 percent. Silver fell 0.62 percent and Copper pushed downward by 3.39 percent for the week. Soft commodities were all lower last week with Livestock falling 1.89 percent, while Grains declined 1.26 percent and Agriculture overall moved lower by 1.44 percent.

Outside of the US last week almost all of the major global indexes declined in value. The best performing index outside of the US last week was found in Sweden, after being the worst performing index two weeks ago, and was the OMX Stockholm 30 Index, which turned in a gain of 1.0 percent, thanks in large part to the increase in the value of the Swedish Krona during the week. The worst performing index last week was found in Japan and was the Nikkei 225 index, which turned in a loss of 4.9 percent for the week, as weakness continues to permeate throughout the Japanese economy in light of negative interest rates being seen in different parts of the world and the failure of Abenomics to get the ball rolling for Japan.

The single digit, double digit trend that we had been seeing for the past 13 weeks continued last week as we saw a double digit move in the VIX. Last week happened to be a downward move as the VIX moved lower by 11.13 percent. That means that if the pattern holds we should see a single digit move this week in the VIX. The VIX remains nearly 35 percent below the average level of the VIX over the past year and it looks like it could push even lower. The current reading of 13.1 implies that a move of 3.75 percent is likely to occur over the next 30 days. As always, the direction of the move is unknown. At some point the VIX will have overreacted to the downside and will be too low relative to the volatility that will likely be seen in the next 30 days. At that point it will likely snap back to near average as it has done so many times in the past.

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

  Last Week Q1 2016 2016 YTD Since 6/30/2015
Aggressive Model 1.72 % 1.75 % 2.24 % 6.61 %
Aggressive Benchmark 1.04 % -0.22 % -0.72 % -5.77 %
Growth Model 1.58 % 1.72 % 2.21 % 5.60 %
Growth Benchmark 0.81  % -0.10 % -0.49 % -4.36  %
Moderate Model 1.40 % 1.65 % 2.16 % 4.93 %
Moderate Benchmark 0.58 % -0.02 % -0.29 % -2.99 %
Income Model 1.38 % 2.27 % 2.84 % 5.52 %
Income Benchmark 0.30 % 0.06 % -0.09 % -1.37 %
S&P 500 1.81 % 0.77 % 1.41 % 0.47 %

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

 

There were no changes to the hybrid models over the course of the previous week. In general the hybrid models remain almost fully invested, but with the investments currently in the models being low volatility focused as we are likely to see the same increased volatility of the past 3 months continue for the foreseeable future. Investments that we are closely watching and would like to purchase at some time in the future include Oil and Gas, Energy and Healthcare and to fill out the current partial positions in Transportation and Technology.

 

Economic Release Calendar: Last week was a busy week for economic news releases as we had both a month and quarter end fall during the trading week. There were two releases that significantly beat expectations (highlighted in green below) and none that significantly missed expectations during the course of the previous week:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Neutral 3/28/2016 PCE Prices February 2016 0.10% 0.20%
Neutral 3/28/2016 Personal Income February 2016 0.20% 0.10%
Neutral 3/28/2016 Personal Spending February 2016 0.10% 0.10%
Slightly Positive 3/28/2016 Pending Home Sales February 2016 3.50% 1.10%
Neutral 3/29/2016 Case-Shiller 20-city Index January 2016 5.70% 5.70%
Positive 3/29/2016 Consumer Confidence March 2016 96.2 94.5
Neutral 3/30/2016 ADP Employment Change March 2016 200K 196K
Neutral 3/31/2016 Continuing Claims Previous Week 2173K 2205K
Neutral 3/31/2016 Initial Claims Previous Week 276K 265K
Positive 3/31/2016 Chicago PMI March 2016 53.6 49.9
Neutral 4/1/2016 Nonfarm Payrolls March 2016 215K 200K
Neutral 4/1/2016 Nonfarm Private Payrolls March 2016 195K 195K
Neutral 4/1/2016 Unemployment Rate March 2016 5.00% 4.90%
Slightly Positive 4/1/2016 ISM Index March 2016 51.8 50.6
Neutral 4/1/2016 University of Michigan Consumer Sentiment March 2016 91.0 90.5

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

 

Last week the economic news releases started Monday with a flurry of economic news releases as personal income and spending as well as PCE prices and pending home sales all came in either close to or slightly above market expectations. Seeing personal income increase during the month of February was nice, but it would have been nicer to see personal spending increase by an equal amount, which turned out not to be the case. Pending home sales was the bright spot of the releases as they increased by 3.5 percent, easily beating the expected 1.1 percent increase. On Tuesday the Case-Shiller 20-City Home Price index was released to show, as expected, home prices increased by 5.7 percent on a year-over-year basis for the month of January. Later during the day on Tuesday Consumer confidence as measured by the US government was shown to have unexpectedly increased during March, a positive development that, coupled with Fed Chair Yellen’s statement, the market reacted positively to. On Wednesday the first of the employment related figures for the week was released with the ADP employment change figure coming in very close to expectations at 200,000 jobs having been created during the month. This was a good sign for the other employment numbers later during the week. On Thursday, in addition to the standard weekly employment figures, which came in as expected, the Chicago area PMI surprised the markets by turning positive. Manufacturing in the great Chicago area was expected to post a contraction during the month of March (under 50), but instead the indicator posted a reading of 53.6, signifying an expansion. While this is just a single data point in the otherwise ugly manufacturing data that we have been seeing over the past few months, it was a very welcome relief to the markets. On Friday the releases that everyone had been waiting all week for were finally released, those being the payroll numbers as well as the official unemployment rate in the US for the month of March. Overall, headline unemployment increased by one tenth of a percent up to 5.0 percent from 4.9 percent during the month. But the payroll figures were both close to 200,000, meaning strong growth on that front. The unemployment rate, however, went up slightly because the labor force participation rate increased from 62.9 up to 63.0 as more unemployed people started to look for work. One negative in the jobs data was that many of the jobs that were created and filled during the month of March were lower paying jobs, such as retail workers, and not higher paying jobs that actually help the US economy in a bigger way. Also released on Friday, but in the shadow of the unemployment figures, was the ISM Index, which jumped over 50 all of the way up to 51.8 from the previous reading of 49.5, signaling that manufacturing in the US overall increased during the month of March. Wrapping up the week last week was the University of Michigan’s Consumer sentiment index for the month of March (final estimate), which came in very close to market expectations and ended up being a non-market moving release as is typical.

 

After such a busy week last week this week is a welcome pause in the flow of economic news releases. There are, however, two releases that could have a noticeable impact on the overall markets; they are highlighted in green below:

 

Date Release Release Range Market Expectation
4/5/2016 ISM Services March 2016 54.00
4/6/2016 FOMC Minutes Previous Meeting N/A
4/7/2016 Continuing Claims Previous Week 2173K
4/7/2016 Initial Claims Previous Week 270K
4/7/2016 Consumer Credit February 2016 $14.40B

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

 

This week the economic news releases start out on Tuesday with the release of the Services side of the ISM, which, if last week’s overall ISM is any indicator, could beat market expectations and should easily come in over 50. On Wednesday the meeting minutes from the previous meeting of the FOMC are set to be released, but with how thorough Chair Yellen was last week it is unlikely that there will be any new information in the minutes that could move the markets. On Thursday the standard weekly unemployment related figures are set to be released with both figures expected to be unchanged when compared to the previous week’s figures. Wrapping up the week on Thursday this week is the release of the February Consumer Credit report, which is expected to show an expansion of $14.4 billion during the month. This report should have little or no impact on the overall financial markets. In addition to the scheduled releases there are also eight speeches being given by Fed officials this week, including one being given by Chair Yellen on Thursday. It will be very interesting to see if all of the speeches start to sound like Chair Yellen’s from last week or if the different officials will continue to have a wide range of opinions as to when interest rates need to be increased.

 

Thought of the week Just how big is Saudi Aramco?

 

Saudi Aramco is the world’s most valuable oil company and easily the world’s most valuable company. Conservative estimates using just $10 per barrel put just the proven oil reserve of the company at $2.5 trillion. That is more than the current market cap of Google, Apple, Microsoft and Berkshire Hathaway combined!

 

Source: Bloomberg

For a PDF version of the below commentary please find it on the PDF webpage here http://wp.me/Ppr8Z-23

Commentary quick take:

 

  • Market statistics:
    • US markets moved lower last week for the first time in the past six weeks

 

  • Speculation about a potential April rate hike by the US Federal Reserve
    • Several key FOMC members gave speeches last week, indicating that a rate hike in April is highly possible
    • The market is pricing in a very low probability of an April rate hike

 

  • Earnings expectations for the first quarter of 2016 are very low

 

  • Fourth Quarter GDP for the US was revised higher last week

 

  • Bombing in Brussels and Pakistan over the past week have rattled the global markets
    • Bombs in Brussels stuck at the core of the EU on Tuesday
    • A large Easter bombing in Pakistan at an Easter gathering adds to the uncertainty in the Middle East in terms of what the Western response will be

 

  • Oil moved lower last week, as global supply was shown to be higher than global demand

 

  • Hybrid investments strategy update:
    • There were no changes last week in the models
    • Overall hybrid allocation is currently cautiously optimistic

 

  • Economic news releases:
    • Durable goods orders missed expectations last week
    • GDP revision came in better than expected
    • Economic news releases this week that could impact the overall financial markets include:
      • Unemployment rate in the US for March
      • Consumer Sentiment
      • Chicago PMI

 

  • This week for the markets:
    • Fed Chair Yellen makes a speech on Tuesday along with the other seven speeches given throughout the week from Federal Reserve officials
    • Politics of terrorism will likely take center stage
    • US employment market
    • Upcoming earnings season kicks off on April 11th with Alcoa

 

  • Thought of the week: What is the combined ageless wisdom of voting FOMC members?


Technical market review: Last week was the first week of negative performance for all three of the US markets in the past two months. The US markets seemed to be lacking a general direction last week as there were limited headlines for the market to latch onto and take into account. With a lack of general direction it was not surprising to see that the bullishness of the past few weeks was greatly lacking and thus the markets gave back a very small part of their recent gains. The charts below show each of the three major indexes, plus the VIX, drawn with green lines. The main index charts have red lines depicting the closest resistance the index may hit in the coming trading weeks, as represented by points that have been tested on each index several times in the last 6 months. For the VIX, the red line remains the rolling 52-week average level of the VIX.

4 charts combined 3-28-16

Not much changed in terms of technical strength of the indexes over the past week as three of the major US indexes moved lower. The Dow (upper right pane above) is the strongest of the three indexes, followed by the S&P 500 (upper left pane above). Bringing up the rear in terms of technical strength is the NASDAQ (lower left pane above), despite the NASDAQ having the best performance of the week last week. While the markets were meandering lower last week, the VIX was moving slightly higher, as is expected when the markets are down. At this point it looks like the US markets in general are lacking the will to move higher, while at the same time not seeing the fears that are needed to push the markets lower. Going forward, the largest driving factors will be much the same as they have been for the past several months as the markets digest the Federal Reserve’s potential upcoming interest rate hikes and start to focus on the first quarter earnings season, which officially kicks off in two weeks’ time. Expectations for earnings season this time around are very low, with Energy continuing to take much of the blame for weak earnings, thanks to the low price of oil. However, this could start to flip around this quarter as energy companies could beat expectations, thanks to the nearly 40 percent increase in the price of oil that we have seen since the middle of February. Oil may play more into the future market movements than just having an impact on the earnings season as prices since February have come up by a large percentage, but now look like they could be rolling back over again. It is very unusual to see oil, or any other commodity for that matter, form a “V” shaped bottom in terms of prices. It is much more normal to see a “W” play out where prices come up after falling, only to move right back down and retest the low point before bouncing higher off those low points, making the “W” shape. Only time will tell if the downward movement of oil that started last week will be sustained, but one of the factors that pushed oil lower last week is that Iran seems to be moving forward with trying to sell as much oil to the international community as it can, despite far fewer customers than it had prior to the sanctions experienced more than decade ago.

 

US news impacting the financial markets: The focus of the news last week here in the US that had an impact on the overall financial markets was speculation about the future potential increase in the Federal Funds rate by the Federal Reserve. There were seven speeches made by Federal Reserve officials last week with St. Louis Fed President James Bullard giving three of them. The majority of the speeches given last week pointed toward a hawkish Fed, meaning that interest rates are likely to push up sooner rather than later, with lines such as “the next rate increase may not be far off.” These recent comments from Fed officials seem to directly contradict what Chair Yellen said in her prepared remarks after the last FOMC meeting at which she struck a much more dovish tone. We may be seeing a bit of a good cop, bad cop scenario playing out in the media as the FOMC is typically either in full agreement or agreement minus a single rogue member when it comes to setting interest rate policy. We may get a little bit more clarity later this week when Chair Yellen gives a speech. It will be very closely watched by Wall Street to see if she has changed her tone at all in terms of sounding more dovish or hawkish. Currently, when looking at the Fed watch numbers released by the CBOE, there is a 10 percent chance that the FOMC will increase interest rates at the April 27th meeting. This percentage, however, increases to a 41 percent chance at the June 15th meeting, which has a scheduled press conference afterwards. When the Fed holds its April meeting we will also be about two weeks into the earnings season for the first quarter of 2016, which could also be a major driving factor for the US and global financial markets.

 

Currently, according to the latest FactSet research data, earnings expectations are very low for the first quarter of 2016. Expectations are that earnings will have contracted by 8.7 percent when looking at a year over year basis. If this comes to fruition, it will also mark four consecutive quarters of year–over-year declines in earnings, something that has not occurred since the great recession of 2008-2009. This expectation of earnings is compiled based on all of the analyst expectations of individual companies and then aggregated. As expected, Energy remains the hardest hit sector, as it has been for the past few quarters with expected earnings declining by nearly 75 percent when compared to the year prior. Company guidance is also taken into account and this too does not look very positive as a full 78 percent of the companies that issued forward guidance about the first quarter of 2016 have issued negative guidance. The Telecommunication and Consumer Discretionary sectors are the two bright spots in terms of positive earnings guidance and expectations, with both sectors expected to show growth of more than 10 percent during the quarter.

 

The final piece of news last week that could have an impact on the overall markets this week was released on Friday while the markets were closed and was the third revision for the Fourth quarter 2015 GDP estimate released by the US government. GDP in the US during the fourth quarter of 2015 was revised up to 1.4 percent from the second release, which was 1.0 percent. The increase was due to a stronger than anticipated increase in consumer spending during the quarter. However, there was much more to the report than the top line showed as corporate profits posted a decline of 11.5 percent during the quarter and earnings fell by more than 3 percent during the quarter as well. Falling corporate earnings is typically a precursor to a declining financial market as companies have to adjust their hiring practices as well as CAPEX spending. While the report looked good at first glance, there were some strong concerns raised about the future health of corporate America and the US economy. Perhaps these figures will make their way into some of the 8 Fed speeches that are slated to be given throughout this week.

 

Global news impacting the markets: Global news was pretty quiet last week in terms of financial news. The biggest impact in terms of global news on the global financial markets last week was the bombings in Brussels on Tuesday when Islamic State sympathizers bombed an airport and metro station in Brussels, which is the home of many European Union institutions. The reaction in the financial markets did not really occur on Tuesday, but rather happened later during the week as investors sold holdings on Thursday (the last trading day of the week in many European markets), opting to not have much exposure to the markets over the long weekend, fearing more terrorist activity could occur.

 

Market Performance: Last week saw all three of the major US indexes move lower, ending the streak of positive weeks for the three major indexes at five weeks of gains:

 

Index Change Volume
NASDAQ -0.46% Below Average
Dow -0.49% Below Average
S&P 500 -0.67% Below Average

 

Last week the markets here in the US moved lower on lower than average volume, but some of the lack of volume can be attributed to only four trading days last week, instead of five, with the markets being closed on Friday. If this is taken into account, it looks like volume would have been average. With volume so low and it being a holiday week, it was not surprising to see the markets drift lower last week as many of the large institutions and money managers took some time off and extended their long weekend. If we see the volume pick back up and the markets move higher this week, it will likely be attributed to investors being back to work.
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
Pharmaceuticals 1.84% Oil & Gas Exploration -3.37%
Biotechnology 1.71% Financials -3.25%
Healthcare 0.80% Natural Resources -3.03%
Utilities 0.51% Energy -2.85%
Technology 0.03% Home Construction -2.26%

Several sectors of the markets jumped from the negative list to the positive this week as Pharmaceuticals, Healthcare and Biotechnology all moved into the top 5 list. This switch was likely due to value investors coming into the sectors after the sectors had been unduly pushed down, buying quality companies on a dip. It was a little surprising to see that the Utilities sector made the top 5 list this week as this sector is normally a top sector when there is a strong risk-off sentiment in the market. This sentiment was not in place last week. With oil declining last week it was not surprising to see Oil and Gas Exploration top the list of negative performance last week with Natural Resources and Energy in general also making the bottom five list. Financials also made the bottom five list last week, thanks in large part to fears over a potential Brexit from the EU, a fear that will only grow larger and larger as we get closer to the referendum vote, which is scheduled for June 23rd of 2016.

Fixed income markets were mixed last week as investors and money managers alike adjusted their positions after listening to several members of the Fed make statements about the future path of interest rate increases here in the US. It was interesting to see both the long and the short end of the yield curve increase, while the belly or middle of the curve declined:

Fixed Income Change
Long (20+ years) 0.37%
Middle (7-10 years) -0.14%
Short (less than 1 year) 0.03%
TIPS -0.35%

Currency trading last week was a little light thanks to the US holiday, but excluding that factor volume was average. The US dollar increased by 1.18 percent against a basket of foreign currencies, with much of the increase coming after the twin bombings in Brussels as international investors fled to the perceived safety of the US dollar. The best performance of the global currencies last week was the Singapore Dollar as it gained 0.64 percent against the value of the US dollar, in what looks like a reversion to the mean trade after the currency was down so much two weeks ago. The weakest of the major global currencies last week was found in the UK and was the British Pound as fears over the Brexit vote mounted. We will likely see further weakness in the British pound as we get closer to voting day on the referendum to stay or go from the EU.

Commodities were mixed over the course of the previous week, as metals and oil moved higher, while grains pushed lower:

Metals Change Commodities Change
Gold -2.90% Oil -4.01%
Silver -3.99% Livestock -3.14%
Copper -2.22% Grains 1.08%
Agriculture -1.42%

The overall Goldman Sachs Commodity Index declined by 2.24 percent last week, thanks to declines seen nearly across the board in all types of commodities. Oil gave up all of the gains it saw two weeks ago and then some last week as it declined by 4.01 percent, thanks in large part to increased supplies of oil coming to the market from the Middle East. The major metals were all negative last week with Gold down 2.90 percent, as Silver fell 3.99 percent and Copper pushed downward by 2.22 percent for the week. Soft commodities were mixed last week with Livestock falling 3.14 percent, while Grains gained 1.08 percent and Agriculture overall moved lower by 1.42 percent.

The global financial markets were mostly lower last week, after fears stemming from Brussels dragged down the European markets. The best performing index last week was found in India and was the Bombay based SENSEX Index, which turned in a gain of 1.5 percent as Prime Minister Modi continues to sign agreements with other countries supporting business growth in India. The worst performing index last week was found in Sweden and was the Stockholm based OMX 30 Index, which turned in a loss of 3.3 percent for the week, as falling oil prices were seen driving stock prices lower.

The single digit, double digit trend that we had been seeing for the past 12 weeks continued last week as we saw a single digit move in the VIX. Last week happened to be an upward move as the VIX moved higher by 5.14 percent. That means that if the pattern holds we should see a double digit move this week in the VIX. The VIX remains nearly 20 percent below the average level of the VIX over the past year and it looks perfectly content staying low relative to recent history. The current reading of 14.74 implies that a move of 4.26 percent is likely to occur over the next 30 days. As always, the direction of the move is unknown. With the VIX well below the 52-week average we may be in for 30 days of relatively calm markets, when compared to what we have seen during the past year.

For the shortened trading week ending on 3/24/2016, returns in the hybrid hypothetical models* (net of a 1% annual management fee) were as follows:

  Last Week 2016 YTD Since 6/30/2015
Aggressive Model -0.86 % 0.51 % 4.80 %
Aggressive Benchmark -1.29 % -1.74 % -6.73 %
Growth Model -0.65 % 0.61 % 3.94 %
Growth Benchmark -1.01  % -1.29 % -5.12  %
Moderate Model -0.37 % 0.74 % 3.47 %
Moderate Benchmark -0.72 % -0.87 % -3.56 %
Income Model -0.17 % 1.44 % 4.08 %
Income Benchmark -0.36 % -0.38 % -1.67 %
S&P 500 -0.67 % -0.39 % -1.32%

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

 

There were no changes to the hybrid models over the course of the previous week. In general, the hybrid models remain almost fully invested, but with the investments currently in the models being low volatility focused, as we are likely to see the same increased volatility of the past 3 months continue for the foreseeable future. Investments that we are closely watching and would like to purchase at some time in the future include Oil and Gas, Energy, Healthcare. We are also closely watching for opportunities to fill out the current partial positions in Transportation and Technology.

 

Economic Release Calendar: Last week was a slow week for economic news releases, but it seemed more like a typical week because of the markets being closed on Friday. There was one release that significantly beat expectations and one that significantly missed expectations during the course of the previous week, highlighted below:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Neutral 3/21/2016 Existing Home Sales February 2016 5.08M 5.37M
Neutral 3/23/2016 New Home Sales February 2016 512K 511K
Neutral 3/24/2016 Initial Claims Previous Week 265K 268K
Neutral 3/24/2016 Continuing Claims Previous Week 2179K 2235K
Neutral 3/24/2016 Durable Orders February 2016 -2.80% -2.90%
Negative 3/24/2016 Durable Goods -ex transportation February 2016 -1.00% -0.20%
Positive 3/25/2016 GDP – Third Estimate Q4 2015 1.40% 1.00%

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

 

Last week the economic news releases started with two housing related figures released on Monday and Wednesday, Existing Home Sales and New Home Sales, both of which came in very close to expectations and led to little reaction in the home builders. On Thursday the standard weekly unemployment related figures were released with both figures coming in slightly below market expectations, but these releases were largely ignored as durable goods orders for the month of February were released at the same time. As expected, overall durable goods order for the month of February declined by 2.8 percent, but what was not expected was the decline of 1 percent in the durable goods order excluding transportation. With both durable goods order figures declining for February, it adds to speculation that the first quarter earnings season could have a negative bias to the releases. On Friday when the markets here in the US were closed the government released their third estimate of GDP for the fourth quarter of 2015, which beat expectations and was discussed further in the national news section above.

 

This trading week holds a month end during the week and with it the standard end of month employment related figures are set to be released. There are several releases that could have a noticeable impact on the overall markets; they are highlighted in green below:

 

Date Release Release Range Market Expectation
3/28/2016 PCE Prices February 2016 0.20%
3/28/2016 Personal Income February 2016 0.10%
3/28/2016 Personal Spending February 2016 0.10%
3/28/2016 Pending Home Sales February 2016 1.10%
3/29/2016 Case-Shiller 20-city Index January 2016 5.70%
3/29/2016 Consumer Confidence March 2016 94.50
3/30/2016 ADP Employment Change March 2016 196K
3/31/2016 Continuing Claims Previous Week 2205K
3/31/2016 Initial Claims Previous Week 265K
3/31/2016 Chicago PMI March 2016 49.9
4/1/2016 Nonfarm Payrolls March 2016 200K
4/1/2016 Nonfarm Private Payrolls March 2016 195K
4/1/2016 Unemployment Rate March 2016 4.90%
4/1/2016 ISM Index March 2016 50.6
4/1/2016 University of Michigan Consumer Sentiment March 2016 90.5

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

 

This busy week starts out on Monday with the release of the PCE price change as well as personal income and spending all for the month of February. All are expected to be very close to zero, thus having no market impact if the expectations are realized. On Tuesday the first of the releases that could impact the overall markets is set to be released, that being Consumer Confidence as measured by the US government for the month of March, which is expected to increase from 92.2 in February to 94.5 in March. If this release falls short of expectations it could be a negative sign for the US economy as we have already seen a slowing in spending/confidence in corporate America and a slowdown in consumer confidence would only exacerbate the issues. On Wednesday the first of the Employment related figures for the week is set to be released, that being the ADP employment change figure for the month of March, with expectations of almost 200,000 jobs having been created during the month. On Thursday the standard weekly unemployment related figures are set to be released with very little change expected from the previous week’s release. Later during the day on Thursday the Chicago area PMI is set to be released with expectations that a slowdown in manufacturing in the greater Chicago area will have slowed a little during March, but that the index will remain just under 50, which is the inflection point between growth and contraction in manufacturing. Friday is all about employment as the government releases its latest figures for payrolls as well as the overall unemployment rate for the month of March and a multitude of other data points related to employment. The key releases will be the payroll numbers, wage growth and labor force participation in terms of what the Fed is likely to be looking at when deciding if now is the time to increase interest rates or not. Later during the day on Friday the ISM Index for the month of March is set to be released and it is expected to have climbed back above 50 after briefly dipping below in February. Wrapping up the week this week is the University of Michigan’s Consumer Sentiment index for the month of March (final estimate), which is expected to show a slight drop when compared to the mid-month estimate.  In addition to the scheduled news releases mentioned above, there are 8 speeches being given this week by Fed officials, including one by Chair Yellen. As is normally the case, these speeches are written well in advance of being given. Any changes to include the latest economic news releases will be latched on to by Wall Street.

 

Thought of the weekWhat is the combined ageless wisdom of the voting FOMC members?

 

The combined age of the voting members of the FOMC is 614 years. There are 10 voting members for 2016 making the average age of the voting members just over 61 years old.

 

Source: Federal Reserve and Wikipedia

For a PDF version of the below commentary please find it on the PDF webpage here http://wp.me/Ppr8Z-23

Commentary quick take:

 

  • Market statistics:
    • US markets pushed higher for the fifth week in a row, but NASDAQ continued to lag

 

  • US Federal Reserve meeting was held last week:
    • Left the Federal Funds rate unchanged at 0.25 to 0.5 percent
    • Lowered expectations for this year’s rates increases
    • Lowered growth estimates for 2016 and 2017 here in the US

 

  • Strong manufacturing numbers here in the US surprised the markets

 

  • Many central banks around the world (16 of them) held rate policy meetings last week
    • Most meetings held interest rates constant
    • Two meetings actually increased interest rates
    • Two meetings cut interest rates

 

  • China’s National People’s Congress came to a close last week
    • No major policies were advanced at the meeting
    • Closing meeting press conference held no new information
    • Concerns are starting to be raised that the government does not really have a 5 year plan at this point

 

  • Oil pushed up slightly last week, helping to drive the global markets higher

 

  • Hybrid investments strategy update:
    • There were a few changes last week in the models
    • While still remaining cautious, I increased the overall exposure to the markets in each of the models
      • Sold the remaining piece of my hedging position
      • Purchased broad-based low volatility exposure through two ETFs

 

  • Economic news releases:
    • Two releases surprised the market to the upside and they were both manufacturing related
    • Economic news releases this week that could impact the overall financial markets include:
      • GDP Q4 2015 (third estimate)
      • Durable Goods Orders

 

  • This week for the markets:
    • Movements will largely be driven by oil and healthcare
    • Politics could move the markets around this week, but it is unlikely any major shifts will be seen

 

  • Interesting Fact: What happens if there is no majority candidate in the Presidential election?


Technical market review: All three of the major US indexes continued to push higher last week for the 5th week in a row, as both the S&P 500 and the Dow broke through their respective resistance levels. NASDAQ, meanwhile, closed the gap between the index and its resistance level. The charts below show each of the three major indexes, plus the VIX, drawn with green lines. The main index charts have red lines depicting the closest upside resistance the index may hit in the coming trading weeks, as represented by a point that has been tested on each index several times in the last 6 months. For the VIX, the red line remains the rolling 52-week average level of the VIX.

4 charts combined 3-21-16

With the movements we saw last week, the S&P 500 (upper left chart above) and the Dow (upper right chart above) are both now meaningfully above their closest resistance level. The next major resistance levels for each of the indexes are the high points from back in October and November, which are between 2 and 3 percent away. The NASDAQ, meanwhile, is fighting hard to make it back to its nearest resistance level, which is approximately 2.5 percent away, as the healthcare sector and biotechnologies in particular continue to weigh heavily on the technology heavy index. At this point the rally of the past 5 weeks looks like it is getting a little long in the tooth, but with central bank accommodations looking to be in place for the foreseeable future in most countries around the world, the flow of easy money may push the global markets higher.

 

US news impacting the financial markets: The main news story of the week last week here in the US was the Federal Reserve March meeting at which the FOMC decided to leave the Federal Funds rate at the previous level of 0.25 to 0.5 percent. This was done for several reasons, but the biggest reason seemed to be the volatility in the global financial markets that we have seen over the past two months,  if you read between the lines on the Fed’s statement. Perhaps more important with this meeting, the Fed finally and officially lowered its expectations on interest rates, meaning the likelihood of increases in 2016 pushed down to 2 times this year from the end-of-2015 expectations of 4 rate hikes during 2016. The median rate for the end of the year is now down to 0.9 percent from 1.4 percent back at end of 2015. This slower increase in the interest rates is mainly due to lower forecasts for growth here in the US. GDP is now expected to grow at only 2.2 percent, down from the end of 2015 projections of 2.4 percent. 2017 expectations were also lowered at this meeting from 2.2 percent down to 2.1 percent. The overall expected unemployment rate was pushed from 4.9 percent down to 4.7 percent as the labor market continues to improve in the Fed’s projections. One of the decision factors that seemed to not garner as much attention as the GDP figures and the interest rate expectations was the inflation projections, all which remain well below the Fed’s target rate of 2 percent. The global financial markets took fewer rate hikes as a positive development in the US and rallied behind the Fed’s decision. But the markets moved on more than just the Fed last week as other economic indicators and a little politics also had impacts.

 

Manufacturing here in the US posted a surprising turnaround last week as both the Empire Manufacturing index as well as the Philadelphia Fed Index posted positive numbers for the first time in many months. The empire manufacturing index posted a reading of 0.6, while the Philly index posted a reading of 12.4. Any reading of zero indicates that there was an expansion in manufacturing in the region during the month. What was surprising on these two releases is how much they beat expectations. Expectations had been for a reading of -9.5 on the Empire index and a reading of -1.4 on the Philly index. While this turn of events in an area of the US economy that has been very weak is positive, it is just a single set of data points. The downward trend in manufacturing seems to be solidly in place over the past few months and it will take a few more positive months in the future to reverse the slide, but this is a step in the correct direction.

 

Politics also made a few headlines last week as the “mini Super Tuesday” primary events were held on Tuesday. As expected, Marco Rubio failed to win his home state of Florida and proceeded to drop out of the Presidential race on the Republican side. That leaves just three candidates from the field of 15 that started, with Donald Trump, Ted Cruz and John Kasich still standing. Tuesday was a very significant night for the Republicans because John Kasich managed to beat Trump in his home state of Ohio, making the road to the Republican nomination much more difficult for Donald Trump. With the convention in Ohio looking more and more likely to be contested and come down to floor votes after the first round of voting (when no delegate has the required number of delegates to win the nomination), it would not be surprising to see the US financial markets a little more on edge than they are currently. This increased uncertainty could prevail past the convention, depending on what Donald Trump decides to do if the Republicans do not nominate him in terms of running as third party candidate. On the Democratic side, Bernie Sanders managed to pull out a few states on Tuesday, but Hillary Clinton still remains the odds on favorite to win the nomination outright. After Tuesday, Sanders has a few more states that he realistically has a chance to win, but it is becoming more and more difficult for him to even mathematically have a route to the magic number of delegations to secure the nomination.

 

Global news impacting the markets: Last week was a very busy week on the central bank front and it made headlines around the world. The central banks or their equivalents made rate decision in each of the following countries last week: Japan, Australia, New Zealand, United States, Iceland, China, Norway, Indonesia, Britain, South Africa, Egypt, Chile, Russia, Mexico, Poland and Columbia. Most of the countries that held meetings held rates steady with a few exceptions, as the Bank of Indonesia cut interest rates from 7 down to 6.75 percent and the Bank of Norway cut rates from 0.75 down to 0.5 percent.  Central banks moving rates higher included the bank of South Africa, which increased rates from 6.75 up to 7 percent, and the Bank of Egypt, which increased rates from 9.25 up to 10.75 percent. Many people are surprised to see that so many central banks even exist, but most countries around the world have some sort of central bank that handles the monetary side of running a country. Meetings are held in many countries on a quarterly basis; it just so happens that last week there was a very high concentration of meetings. In typical fashion, developed countries followed the cue from the US in keeping rates unchanged, but they do not have to, as each central bank is supposed to do what is best given what is going on in their individual country. All countries pretty much had the same few talking points concerning their rate policy, quoting uncertainty out of China, the strong US dollar and the weak oil prices as reasons for weakness around the world. The financial markets around the world took all of these meetings in stride and seemed to not worry about countries that have set negative interest rates and undertaken other exotic monetary policies in an attempt to spur growth within each of their countries.

 

China was a main topic at probably all of the central bank meetings. China itself had a major meeting draw to a conclusion last week as the National People’s Congress wrapped up 10 days of meeting for officials to go over the 5 year plan for China. What was different this year from the meeting, which is held every 5 years, is that no clear plan was outlaid by any government officials, at least not publically. Typically at this meeting, they let the world know what they will be doing over the next 5 years to try to help the Chinese economy grow and move forward. However, at the conclusion of this meeting there was a very confusing press conference held by Premier Li Keqiang during which he fielded questions for the better part of 2 hours from the international media and proceeded to answer in any reasonable fashion zero of the questions. This caused some concern in the markets as there are now more fears that China could be in for a “hard landing” and that the government in China really does not have a solid plan for what to do moving forward. To me, one positive thing that was done by not answering questions is that Premier Keqiang did not box China into any specific actions or pledges other than the obvious: China will do what it needs to do to try to achieve a growth rate near 6.5 percent in 2016. One factor that should be helping China’s growth rate is the relatively low price of oil.

 

Oil moved slightly higher last week, but still remains right around $40 per barrel, which is significantly lower than it was over the majority of the last 5 years. Since the bottom in February (if that really was the bottom), oil prices have moved up by nearly 40 percent and with prices moving higher for crude oil, prices for gasoline have started to tick higher around the world as well. It is interesting that prices at the pump do not fall nearly as fast as oil prices to the down side, but as soon as prices of oil tick up gas prices move upward in tandem. Last week we saw some of the first benefits of lower oil prices in the markets as a few of the major airlines turned profits and had lower costs of fuel driving much of the profits. It still looks far too early to call the bottom in the price of oil as the freeze that is in place already looks like it is being cheated by several key countries and Iran continues to bring millions of barrels of oil to market every single day, adding to the surplus that the market has been seeing for the past several months.

 

Market Performance: Last week saw all three of the major US indexes continue to push higher for the fifth week in a row as the price of oil continued higher:

 

Index Change Volume
Dow 2.26% Above Average
S&P 500 1.35% Above Average
NASDAQ 0.99% Average

 

 

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
Transportation 4.97% Pharmaceuticals -6.36%
Oil & Gas Exploration 3.48% Biotechnology -4.05%
Aerospace & Defense 3.32% Healthcare -2.44%
Home Construction 3.11% Medical Devices -0.70%
Industrials 3.06% Healthcare Providers -0.69%

Much of the move in transportation was due to the airlines spiking higher, as mentioned above, thanks to the lower fuel input costs. On the downside this week it was interesting to see that anything even remotely associated with healthcare seemed to have a very bad week, with Pharmaceuticals being hit the hardest. Pharma was hit because Valeant Pharmaceuticals announced that it was in a very tight financial spot, Valeant has long been a darling of the hedge fund industry and it now looks like it has hit a major bump in the road as the stock was down more than 60 percent for the week. Hedge fund manager Bill Ackman saw his main hedge fund lose almost a billion dollars on just his Valeant bet last week and recently it has been announced that he is putting himself on the board of directors in order to try to right the ship after the ousting of the current CEO.

Fixed income markets were positive last week as investors and money managers alike adjusted their positions with the updated data from the US Fed meeting:

Fixed Income Change
Long (20+ years) 1.33%
Middle (7-10 years) 0.87%
Short (less than 1 year) 0.02%
TIPS 1.31%

Currency trading volume was typical last week as traders made adjustments to their books, primarily after the Fed meeting. The US dollar decreased by 1.24 percent against a basket of foreign currencies, with much of the decrease being due to the lowered expectations of rate hikes from the Fed for 2016. The best performance of the global currencies last week was the Chinese Renminbi as it gained 2.10 percent against the value of the US dollar. There were no currencies that fell against the value of the US dollar last week, but the weakest of the major global currencies was the Singapore Dollar, which was flat versus the US dollar for the week.

Commodities were mixed over the course of the previous week, as metals and oil moved higher, while grains pushed lower:

Metals Change Commodities Change
Gold 0.33% Oil 2.85%
Silver 2.11% Livestock 0.40%
Copper 2.39% Grains -0.36%
Agriculture 1.30%

The overall Goldman Sachs Commodity Index advanced by 1.06 percent last week, thanks to the continued gains in oil and metals. Oil saw one the smallest weekly moves of the year thus far after moving only 2.85 percent higher as the freeze in production seems to be at least increasing prices slightly, despite it not holding very tightly. The major metals were all positive with Gold up 0.33 percent, as Silver advanced 2.11 percent and Copper pushed upward by 2.39 percent for the week. Soft commodities were mixed last week with Livestock gaining 0.40 percent, while Grains declined 0.36 percent and Agriculture overall moved higher by 1.30 percent.

The global financial markets were mostly higher last week, riding the coattails of central bankers. The best performing index last week was found in China and was the Shanghai Se Composite Index, which turned in a gain of 5.2 percent. The worst performing index last week was found in Switzerland and was the Swiss Market Index, which turned in a loss of 2.3 percent.

The single digit, double digit trend that we had been seeing for the past 11 weeks continued last week as we saw a double digit move in the VIX. Last week happened to be a downward move as the VIX moved lower by 15.03 percent. That means that if the pattern holds we should see a single digit move this week in the VIX. The current reading of 14.02 implies that a move of 4.05 percent is likely to occur over the next 30 days. As always, the direction of the move is unknown. With the VIX well below the 52-week average we may be in for 30 days of relatively calm markets, when compared to what we have seen during the past year.

For the trading week ending on 3/18/2016, returns in my hypothetical models* (net of a 1% annual management fee) were as follows:

  Last Week 2016 YTD Since 6/30/2015
Aggressive Model 1.03 % 1.38 % 5.71 %
Aggressive Benchmark 1.26 % -0.45 % -5.51 %
Growth Model 0.84 % 1.27 % 4.63 %
Growth Benchmark 0.98  % -0.28 % -4.16  %
Moderate Model 0.58 % 1.12 % 3.86 %
Moderate Benchmark 0.70 % -0.16 % -2.86 %
Income Model 0.44 % 1.61 % 4.26 %
Income Benchmark 0.35 % -0.02 % -1.31 %
S&P 500 1.35 % 0.28 % -0.66%

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

 

There were a few changes made to the hybrid investment models last week with the first move being to sell the remaining position in the hedging mutual funds. This was done as the risks to the downside diminished and several of my signals that we watch for when it is time to be very conservative in the models flipped. With the proceeds from the sale of the Rydex Inverse S&P 500 fund we purchased some low volatility broad market exposure. In switching from being more defensive in nature to more offensive it was best to use two ETFs in tandem, in most cases those being S&P 500 Low Volatility fund (SPLV) and the Schwab Dividend Equity Fund (SCHD). In looking at various sectors and investment possibilities we saw a very beneficial risk and reward ratio on the low volatility side of the S&P 500. The trades into both SPLV and SCHD are partial positions with the ability to fill out the positions at a later date if need be. Other than the broad exposure to low volatility, we are still watching oil and gas exploration as well as MLPs, Energy and potentially even Healthcare as the highest potential areas of future investment.

 

Economic Release Calendar: Last week was a busy week for economic news releases with the biggest surprises coming on the strong manufacturing data:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Neutral 3/15/2016 Retail Sales February 2016 -0.10% -0.10%
Neutral 3/15/2016 Retail Sales ex-auto February 2016 -0.10% -0.20%
Neutral 3/15/2016 PPI February 2016 -0.20% -0.20%
Neutral 3/15/2016 Core PPI February 2016 0.00% 0.10%
Positive 3/15/2016 Empire Manufacturing March 2016 0.6 -9.5
Neutral 3/16/2016 CPI February 2016 -0.20% -0.20%
Neutral 3/16/2016 Core CPI February 2016 0.30% 0.10%
Neutral 3/16/2016 Housing Starts February 2016 1178K 1137K
Neutral 3/16/2016 Building Permits February 2016 1167K 1204K
Neutral 3/16/2016 FOMC Rate Decision March 2016 N/A N/A
Neutral 3/17/2016 Initial Claims Previous Week 265K 266K
Neutral 3/17/2016 Continuing Claims Previous Week 2235K NA
Positive 3/17/2016 Philadelphia Fed March 2016 12.4 -1.4
Slightly Negative 3/18/2016 University of Michigan Consumer Sentiment March 2016 90.0 92.2

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

 

The economic news releases started on Tuesday last week with retail sales for the month of February, which, as expected, declined by one tenth of a percent overall, while also sliding by one tenth of a percent when excluding auto sales. Falling retail sales is not a positive development for the US economy, but with sales only falling one tenth of a percent the markets seemed to take this release in stride, choosing instead to focus on the Empire Manufacturing index, which was released at the same time. Expectations had been for the empire manufacturing index to show a negative 9.5 reading, signaling a contraction for the eighth straight month, but instead an expansion in manufacturing was registered as the figure came in at 0.6. The market cheered this release as manufacturing had been one of the weakest and weakening areas of the US economy with many economists worried about the knock on effects of a prolonged downturn in manufacturing. On Wednesday the Consumer Price Index (CPI) was released to show prices decline at the consumer level overall, while it increased slightly when only looking at core items. The big news of the day on Wednesday, as expected, was the release of the latest FOMC decision on interest rates and the ensuing press conference held by Chair Yellen, despite the press conference holding little new news that was not outlined in the decision statement. On Thursday the markets focused on the second business activity and manufacturing related release for the week, that being the Philadelphia Fed Index, which like the Empire Index also posted a positive number even though expectations had been for a negative print. With this release, there were two positives indicators on the manufacturing front in less than a week and the markets seemed to rally on the news. Wrapping up the week last week was the release of the University of Michigan’s Consumer Sentiment index for the month of March (second estimate), which posted a lower reading than was anticipated by the markets.

 

After a busy week last week for economic news releases, the markets this week will have far fewer releases to digest. There are several releases that could have a noticeable impact on the overall markets; they are highlighted in green below:

 

Date Release Release Range Market Expectation
3/21/2016 Existing Home Sales February 2016 5.37M
3/23/2016 New Home Sales February 2016 511K
3/24/2016 Initial Claims Previous Week 268K
3/24/2016 Continuing Claims Previous Week 2235K
3/24/2016 Durable Orders February 2016 -2.90%
3/24/2016 Durable Goods -ex transportation February 2016 -0.20%
3/25/2016 GDP – Third Estimate Q4 2015 1.00%

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

 

This week the economic news releases start on Monday with the release of the existing home sales figure for the month of February, which is expected to post a reading of more than 5 million homes being sold during February. On Wednesday the new home sales figures for the month of February is set to be released with expectations of a little more than 500,000 units having been sold. On Thursday the standard weekly unemployment related figures are set to be released, but there are no expectations of much deviation from the past week’s releases and these should be non market moving releases. However, later during the day on Thursday durable goods orders, both including and excluding transportation, are set to be released for the month of February and these could have a noticeable impact on the overall markets if they come in different than anticipated. With negative figures expected on both releases the largest market move would be on an upside surprise on these releases, which is entirely possible given the strong manufacturing data we saw come out last week. Wrapping up the week on Friday is the release of the third estimate of GDP for the fourth quarter of 2015, which is expected to come in at 1.0 percent growth just like the second estimate. It is unlikely, but not impossible, that this release comes in highly different than expected given the fact that it is the third estimate of the same data set from the US government.

 

Thought of the weekWhat happens if there is no majority candidate in the Presidential election?

 

Going in to an interesting part of the history books and constitutional law this week, I looked at what happens if Trump decided to run a third party and is able to pull enough votes in the general election away from both Democrats and Republicans so that no single candidate manages to secure a majority of the votes. Given no candidates with a majority, the House of Representatives picks the president by having each state cast a single vote for both President and Vice President. In theory at least, the President could be picked by the House and be someone that was not actually even running in the general election! It’s happened twice before in American history.

 

 

Source: Constitutional Rights Association http://www.crf-usa.org/bill-of-rights-in-action/bria-8-4-a-the-election-of-1824-25-when-the-house-chose-the-president

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