Archive for April, 2015

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SITREP: n. a report on the current situation; a military abbreviation; from “situation report”.

*****************************************************

The very big picture:

In the “decades” timeframe, the question of whether we are in a continuing Secular Bear Market that began in 2000 or in a new Secular Bull Market has been the subject of hot debate among economists and market watchers since 2013, when the Dow and S&P 500 exceeded their 2000 and 2007 highs.  The Bear proponents point out that the long-term PE ratio (called “CAPE”, for Cyclically-Adjusted Price to Earnings ratio), which has done a historically great job of marking tops and bottoms of Secular Bulls and Secular Bears, did not get down to the single-digit range that has marked the end of Bear Markets for a hundred years, but the Bull proponents say that significantly higher new highs are de-facto evidence of a Secular Bull, regardless of the CAPE.  Further confusing the question, the CAPE now has risen to levels that have marked the end of Bull Markets except for times of full-blown market manias.  See Fig. 1 for the 100-year view of Secular Bulls and Bears.

 

Fig 1

Fig. 1

Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best.   The CAPE is at 27.3, barely changed from the prior week’s 27.4, and approximately at the level reached at the pre-crash high in October, 2007.  In fact, since 1881, the average annual returns for all ten year periods that began with a CAPE at this level have been just 3%/yr (see Fig. 2).

 

Fig 2

Fig. 2

This further means that above-average returns will be much more likely to come from the active management of portfolios than from passive buy-and-hold.  Although a mania could come along and cause the CAPE to shoot upward from current levels (such as happened in the late 1920’s and the late 1990’s), in the absence of such a mania, buy-and-hold investors will likely have a long wait until the arrival of returns more typical of a rip-snorting Secular Bull Market.

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate.  The US Bull-Bear Indicator (see Fig. 3) is at 54.8, down from the prior week’s 55.3, and continues in Cyclical Bull territory.  The current Cyclical Bull has taken the US and some of Europe to new all-time highs, but many of the world’s markets have yet to top 2007’s levels – particularly in the Emerging Markets area.

 

Fig. 3

Fig. 3

In the intermediate picture:

The intermediate (weeks to months) indicator (see Fig. 4) is Positive and ended the week at 32, down 1 from the prior week. Separately, the quarter-by-quarter indicator – based on domestic and international stock trend status at the start of each quarter – gave a positive indication on the first day of January for the prospects for the first quarter of 2015.

 Fig. 4Fig. 4

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), whether we are in a new Secular Bull or still in the Secular Bear, the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns.  In the Cyclical (months to years) timeframe (Fig. 3), all major equity markets are in Cyclical Bull territory.  In the Intermediate (weeks to months) timeframe (Fig. 4), US equity markets are rated as Positive.  The quarter-by-quarter indicator gave a positive signal for the 1st quarter:  US equities were in an uptrend, while International equities were in a downtrend at the start of Q1 2015, and either one being in an uptrend is sufficient to signal a higher likelihood of an up quarter than a down quarter.

In the markets:

On Friday the Dow rose 183 points to regain the 18,000 level closing at 18,024, but ended down -0.31% for the week.  The NASDAQ likewise regained the psychologically important 5000 level, but gave up 86 points or ‑1.7% to end the week at 5005.  The small-cap Russell 2000 bore the brunt of the selling giving up -3.11% for the week.  The S&P MidCap 400 index also ended the week down -1.33%.  Both the S&P 500 and Canada’s TSX shed -0.44% for the week.

In international markets, for the week Developed International was down -0.22%, while Emerging Markets slid ‑1.61%.  Individually, the German DAX was down a heavy -3.02%, the French CAC 40 fell ‑2.98%, and the London FTSE fell -1.20%.  In Asia, the Chinese Shanghai stock exchange composite had its eighth weekly gain up +1.09% and Hong Kong’s Hang Seng index also notched a slight gain, up +0.26%.   Japan’s Nikkei was unable to hold the 20,000 level ended the week down -2.44% to close at 19,531.

Turning to commodities, gold gave up $2.70 an ounce, to close at $1177.20.  Silver managed a $0.41 gain, to close at $16.12 an ounce, up +2.61%.  Oil continues its recent rebound, up +3.20%, ending the week at $59.26 a barrel.

For the month of April, the US continued this year’s pattern of underperformance relative to the rest of the world (a contrast to the prior 4 years of US outperformance).   US indices were the laggards again, finishing the month between -2.6% (SmallCaps) and +0.9% (S&P500 LargeCaps).  On the other hand, most non-US indices were substantially better than the US.  Canada’s TSX rose +2.2%, Developed International climbed +3.7%, and Emerging International rocketed higher by an impressive +6.9%

In US economic news, the headline for the week was the shockingly low Gross Domestic Product (GDP) for the first quarter.  It was reported at just an annualized +0.2%, missing the already-reduced consensus forecast of just +1%.  Exports dropped -7.2%, likely due to the stronger dollar and West Coast port labor issues.  Government spending at all levels fell and business investment sank ‑3.4%, its worst quarterly performance since the ’08-’09 recession.  Government spokesmen expressed hope that GDP might follow the path it took last year when contraction in Q1 was followed by strong rebounds in the following two quarters.

The Institute for Supply Management (ISM) April manufacturing index remained at 51.5, the same as in March, while exports swung back into expansion territory.  The April Purchasing Managers Index (PMI) manufacturing report noted that manufacturing lost momentum in April.  Factory output and new orders both rose at slower rates and new export business declined for the first time since November. The PMI report for the Services sector, however, remained extremely strong at 57.8.

The Federal Reserve wants to see wages rising faster than inflation so that consumers can feel comfortable about their spending habits.  The core inflation gauge favored by the Fed increased +1.4% versus a year ago, the same rate as in February.  Annual wage growth rose just +0.7% in one report, but the Wages and Salaries component of the Employment Cost Index was up +2.5%., the best since 2008, giving rise to hope that wage gains may soon top inflation.  In another hopeful sign, household debt continues to decline.  Cleveland Fed Pres. Loretta Mester stated that better household finances will help drive US economic growth.  Mester noted that “Household debt relative to disposable personal income has fallen to near its longer-run trend.”

In Canada, the Industrial Product Price Index ticked up +0.3% in March as petroleum prices rebounded.  The index remains 1.8% lower for the year.

Eurozone unemployment remained at 11.3% in March, with the youth unemployment component being twice that at 22.7%.  Germany had the lowest jobless rate at 4.7% while Greece and Spain had the highest at 25.7% and 23.0%.  In Germany, retail sales dropped -2.3% in March versus expectations of a +0.5% increase, but sales remain +3.5% higher than year ago and consumer confidence remained high.  In France, producer prices gained +0.1% in March as expected, but are still -2.2% lower versus a year ago.

Japan’s sovereign debt rating was cut to single-A by Fitch Ratings as the government delayed a planned tax hike to reduce its debt burden.  Fitch stated that the government’s reliance on stimulus spending to support its economy was the reason for the downgrade.  Japan’s retail sales had a large -9.7% yearly decline in March, worse than the ‑6.8% expected.  March was the third straight month to record year-on-year declines.

Finally, tech behemoth Apple released its second-quarter revenue numbers last week.  Revenues for the quarter came in at $58 billion and earnings came in at $13.6 billion.  Since the beginning of the fiscal year about 70% of Apple’s revenues came from iPhone sales and sales in China were up a huge +70% from a year ago.  Apple CEO Tim Cook has described Apple’s revenues as a “three-legged stool” with revenues from the iPhone, iPad and Mac.  Business Insider dug a little deeper into the numbers and discovered that Cook’s iPad “leg” is a weak one, with negative year-over-year sales growth in most quarters of the last two years.

in the markets

Further, since Mac sales are puny compared to iPhone sales, Business Insider concludes that contrary to Cook’s assertion, Apple instead is a “one-legged stool” with that one leg being described by an analyst as “CHINA’S MIDDLE CLASS LOVES IPHONES”.

(sources: Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, stocksandnews.com, wantchinatimes.com, BBC, 361capital.com, pensionpartners.com; Figs 3-5 source W E Sherman & Co, LLC)

Summary:

The US has led the worldwide recovery, and continues to be among the strongest of global markets.  However, the over-arching Secular Bear Market may remain in place globally even as new highs are reached in the US.

Because the world may still be in a Secular Bear, we have no expectations of runs of multiple double-digit consecutive years, and we expect poor market conditions to be a frequent occurrence.  Nonetheless, we remain completely open to any eventuality that the market brings, and our strategies, tactics and tools will help us to successfully navigate whatever happens.

Fig. 5

Fig. 5

*****************************************************

SITREP: n. a report on the current situation; a military abbreviation; from “situation report”.

*****************************************************

The very big picture:

In the “decades” timeframe, the question of whether we are in a continuing Secular Bear Market that began in 2000 or in a new Secular Bull Market has been the subject of hot debate among economists and market watchers since 2013, when the Dow and S&P 500 exceeded their 2000 and 2007 highs.  The Bear proponents point out that the long-term PE ratio (called “CAPE”, for Cyclically-Adjusted Price to Earnings ratio), which has done a historically great job of marking tops and bottoms of Secular Bulls and Secular Bears, did not get down to the single-digit range that has marked the end of Bear Markets for a hundred years, but the Bull proponents say that significantly higher new highs are de-facto evidence of a Secular Bull, regardless of the CAPE.  Further confusing the question, the CAPE now has risen to levels that have marked the end of Bull Markets except for times of full-blown market manias.  See Fig. 1 for the 100-year view of Secular Bulls and Bears.

 

Fig 1

Fig. 1

Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best.   The CAPE is at 27.1, down slightly from the prior week’s 27.3, and approximately at the level reached at the pre-crash high in October, 2007.  In fact, since 1881, the average annual returns for all ten year periods that began with a CAPE at this level have been just 3%/yr (see Fig. 2).

 

Fig 2

Fig. 2

This further means that above-average returns will be much more likely to come from the active management of portfolios than from passive buy-and-hold.  Although a mania could come along and cause the CAPE to shoot upward from current levels (such as happened in the late 1920’s and the late 1990’s), in the absence of such a mania, buy-and-hold investors will likely have a long wait until the arrival of returns more typical of a rip-snorting Secular Bull Market.

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate.  The US Bull-Bear Indicator (see Fig. 3) is at 54.1, down from the prior week’s 55.0, and continues in Cyclical Bull territory.  The current Cyclical Bull has taken the US and some of Europe to new all-time highs, but many of the world’s markets have yet to top 2007’s levels – particularly in the Emerging Markets area.

 

Fig. 3

Fig. 3

In the intermediate picture:

The intermediate (weeks to months) indicator (see Fig. 4) is Positive and ended the week at 32, unchanged from the prior week. Separately, the quarter-by-quarter indicator – based on domestic and international stock trend status at the start of each quarter – gave a positive indication on the first day of January for the prospects for the first quarter of 2015.

 Fig. 4Fig. 4

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), whether we are in a new Secular Bull or still in the Secular Bear, the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns.  In the Cyclical (months to years) timeframe (Fig. 3), all major equity markets are in Cyclical Bull territory.  In the Intermediate (weeks to months) timeframe (Fig. 4), US equity markets are rated as Positive.  The quarter-by-quarter indicator gave a positive signal for the 1st quarter:  US equities were in an uptrend, while International equities were in a downtrend at the start of Q1 2015, and either one being in an uptrend is sufficient to signal a higher likelihood of an up quarter than a down quarter.

In the markets:

Stock indexes were red across the board as Friday marked the end of a tumultuous week.  The Dow Jones Industrial Average lost 279 points to end the week at 17, 826, down -1.28%.  The NASDAQ continued its retreat from the 5000 level, to close at 4931 down -1.28% for the week.  The S&P 500 showing slight relative strength, only down -1% to close at 2081.  Mid-caps and small caps were down -1.25% and -1.02% respectively.  Canada’s TSX had only a fractional loss, down -0.18%, on a sharp rebound in oil prices

Emerging markets and Developed International were each down only -0.4%.  The German DAX plunged -5.54%, the London FTSE dropped -1.34%, and France’s CAC 40 lost -1.85%.  China and Hong Kong remained red-hot as the Shanghai Stock exchange composite jumped +6.27% and Hong Kong’s Hang Seng gained +1.40%.

Gold gave up -0.36% for the week to close at $1203 an ounce.  Silver also gave up -1.46% to close at $16.25 an ounce.  West Texas intermediate crude oil leapt +8.26% and finished the week at the $57/bbl level.

In US economic news, retail sales saw solid gains in March with a +0.9% monthly gain that just missed expectations of a 1.1% rise.  Excluding autos and gas, the increase was +0.5% versus expectations of +0.4%.  Gus Faucher, senior economist for PNC Financial Services stated “It was a very solid report, the details were very encouraging.”  The sales data supported the belief that the fundamentals for consumers to power the economy are in place, Faucher said.  With job gains averaging 260,000 per month over the past year, the long-awaited pickup in wages may be at hand.

Consumer sentiment rose nearly 3 points to 95.9 in the University of Michigan’s preliminary reading for April.  It beat expectations of 95.0 and marked the second highest reading since 2007.

CoreLogic reported there were 39,000 completed foreclosures in February, down 11.6% from January and representing a 67% decline in foreclosures from the peak in February 2010.  Confirming this reading was the National Association of Homebuilders Index, which rose 4 points to 56 for April, beating expectations, and recording the highest level of 2015.  Housing starts slowed down to a 926,000 annualized pace in March, up 2% versus February, but below expectations for a 1.0 4 million rate.

On the negative side of the ledger, US industrial production declined 0.6% in March, following a 0.1% gain in February, worse than expectations of a 0.3% drop.  Capacity utilization dropped to 78.4%, 1.7 percentage points below its 30 year average and retreating away from the 80% level at which firms generally need to invest new capital.  The New York Fed’s manufacturing index turned negative in April, dropping to -1.19 from 6.90, missing expectations of a rise to 7.0.  This is only the second time it’s done that in nearly 2 years.  The New Orders index went further into contraction at -6 suggesting future growth is likely to be weak.

Canadian manufacturing sales fell 1.7% in February; analysts had expected a 0.4% gain.  January’s reading was revised down sharply to a 3.1% decline.  For the year, sales were 1.5% lower.  However, Canadian retail sales jumped 1.7% in February, beating forecasts of a 0.5% gain.  For the year sales stood 2.5% higher versus 1.3% higher in January.  The consumer price index rose 0.7% in March, more than the 0.5% expected.  For the year, the CPI rose 1.2%.

In its latest forecast, the IMF said the strengthening dollar is boosting growth in the Euro area and Japan while taking some steam out of the U.S. recovery.  The International Monetary Fund left its projection for global growth in 2015 unchanged from three months ago at +3.5%, according to its World Economic Outlook released Tuesday.

Eurozone Industrial Production rose +1.1% in February, handily beating expectations of a +0.3% gain.  Capital goods and durable consumer goods were each up +1%.  In Italy, industrial production was up +0.6% in February, much better than the -0.7% decline from January, and ahead of expectations.  Capital goods saw a +1.1% jump versus January, while consumer goods remained flat.  In the United Kingdom the consumer price index notched a +0.2% gain in March, just missing expectations by +0.1%.  The U.K. jobless rate dropped to 5.6% as expected as there were 20,000 fewer unemployment claimants in March.  This was the 29th straight decline, and with the jobless rate is at its lowest since 2008, the UK continues to lead Europe economically.

China’s trade surplus sank to a 13 month low as exports were down -15% year-over-year versus expectations for an +11.7% gain.  Imports dropped -12.7%, slightly more than the -12.3% expected.  Overall trade fell -6.3% in the first quarter compared to the official target of +6% growth in trade in 2015. This suggests the government may step up its stimulus efforts to boost the economy and growth.  Sometimes bad news is good news – expectation of government stimulus drove the Shanghai composite +2.2% higher on Monday and more than +6% higher for the week.   China’s GDP expanded +7% in the first quarter versus the same period last year.  Industrial production slowed to a +5.6% year-over-year gain in March versus +6.8% in February and lower than the +6.9% expected.  China’s retail sales are slowing as well as sales rose just +0.71% in March, down from +0.93% in February.  For the year, sales were up +10.2%, but below forecasts for a +10.9% gain.

With Tax Day falling on Wednesday of this past week, the Wall Street Journal published a graphic depicting who actually pays the majority of income taxes in America.

 

In the markets

The top 40% of wage-earners in the United States pay over 97% of the total income tax, while he bottom 40% pay no taxes (through tax credits, the bottom 40% actually receive money from the government instead of paying taxes to the government).  The brash Mark Cuban has a typically different view of taxes – he’s the billionaire entrepreneur and investor and one of the “sharks” on the popular television show “Shark Tank”.  He says, “The most patriotic thing you can do is bust your ass and get rich.  Make a boatload of money.  Pay your taxes – lots of taxes.  Hire people.  Train people.  Pay people.  Spend money on rent, equipment, services – and then pay more taxes.”  Perhaps Cuban’s point of view helps reduce the sting of April 15th.

(sources: Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, stocksandnews.com, wantchinatimes.com, BBC, 361capital.com, pensionpartners.com; Figs 3-5 source W E Sherman & Co, LLC)

Summary:

The US has led the worldwide recovery, and continues to be among the strongest of global markets.  However, the over-arching Secular Bear Market may remain in place globally even as new highs are reached in the US.

Because the world may still be in a Secular Bear, we have no expectations of runs of multiple double-digit consecutive years, and we expect poor market conditions to be a frequent occurrence.  Nonetheless, we remain completely open to any eventuality that the market brings, and our strategies, tactics and tools will help us to successfully navigate whatever happens.

Fig. 5

Fig. 5

*****************************************************

SITREP: n. a report on the current situation; a military abbreviation; from “situation report”.

*****************************************************

The very big picture:

In the “decades” timeframe, the question of whether we are in a continuing Secular Bear Market that began in 2000 or in a new Secular Bull Market has been the subject of hot debate among economists and market watchers since 2013, when the Dow and S&P 500 exceeded their 2000 and 2007 highs.  The Bear proponents point out that the long-term PE ratio (called “CAPE”, for Cyclically-Adjusted Price to Earnings ratio), which has done a historically great job of marking tops and bottoms of Secular Bulls and Secular Bears, did not get down to the single-digit range that has marked the end of Bear Markets for a hundred years, but the Bull proponents say that significantly higher new highs are de-facto evidence of a Secular Bull, regardless of the CAPE.  Further confusing the question, the CAPE now has risen to levels that have marked the end of Bull Markets except for times of full-blown market manias.  See Fig. 1 for the 100-year view of Secular Bulls and Bears.

Fig 1

Fig. 1

Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best.   The CAPE is at 27.3, up slightly from the prior week’s 27.2, and approximately at the level reached at the pre-crash high in October, 2007.  In fact, since 1881, the average annual returns for all ten year periods that began with a CAPE at this level have been just 3%/yr (see Fig. 2).

Fig 2

Fig. 2

This further means that above-average returns will be much more likely to come from the active management of portfolios than from passive buy-and-hold.  Although a mania could come along and cause the CAPE to shoot upward from current levels (such as happened in the late 1920’s and the late 1990’s), in the absence of such a mania, buy-and-hold investors will likely have a long wait until the arrival of returns more typical of a rip-snorting Secular Bull Market.

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate.  The US Bull-Bear Indicator (see Fig. 3) is at 55.0, up from the prior week’s 53.7, and continues in Cyclical Bull territory.  The current Cyclical Bull has taken the US and some of Europe to new all-time highs, but many of the world’s markets have yet to top 2007’s levels – particularly in the Emerging Markets area.

Fig. 3

Fig. 3

In the intermediate picture:

The intermediate (weeks to months) indicator (see Fig. 4) is Positive and ended the week at 32, unchanged from the prior week. Separately, the quarter-by-quarter indicator – based on domestic and international stock trend status at the start of each quarter – gave a positive indication on the first day of January for the prospects for the first quarter of 2015.

 Fig. 4Fig. 4

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), whether we are in a new Secular Bull or still in the Secular Bear, the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns.  In the Cyclical (months to years) timeframe (Fig. 3), all major equity markets are in Cyclical Bull territory.  In the Intermediate (weeks to months) timeframe (Fig. 4), US equity markets are rated as Positive.  The quarter-by-quarter indicator gave a positive signal for the 1st quarter:  US equities were in an uptrend, while International equities were in a downtrend at the start of Q1 2015, and either one being in an uptrend is sufficient to signal a higher likelihood of an up quarter than a down quarter.

In the markets:

The Dow Jones Industrial Average gained 98 points on Friday as the index reclaimed the 18,000 level.  The Dow gained 294 points for the week, a +1.6% gain.  The NASDAQ is once again nearing the 5000 level, up 109 points for the week – a +2.23% gain.  The large-cap S&P 500 index rose +1.7% for the week, while the MidCap 400 and SmallCap Russell 2000 each tacked on a +0.7% gain.  Canada’s TSX jumped +2.41%, its second straight weekly gain, to close at 15388.

West Texas intermediate crude oil jumped +4.52% for the week.  Precious metals were mixed as gold gained almost half a percent to close at $1208.10, but silver dropped -1.58% to end the week at $16.49 an ounce.

Around the world, Emerging Markets leapt +4% last week and Developed International gained +1.64%.  In Europe, Germany’s DAX tacked on another +3.4% for the week to reach new all-time high.  Not to be left behind, France’s CAC 40 gained +3.28%, and the London FTSE also gained +3.75%.  Asian markets have been particularly strong of late – China’s Shanghai Composite has risen dramatically, up over +25% in just the last 5 weeks.

In US economic news, the service sector remained resilient as the Institute for Supply Management (ISM) nonmanufacturing index declined to 56.5 in March.  The reading was lower than the 56.7 expected, but still strong.  Consumer confidence surged to a near eight year high in Bloomberg’s Consumer Comfort index for the April 5 week.  Despite the dollar’s strength, export prices fell -0.4% in March, more than the downwardly revised ‑0.3% decline in February, and are -6.7% lower for the trailing year.  Import prices fell -0.3% as expected, and are a very substantial ‑10.5% lower than year ago levels. Markit’s final March service-sector Purchasing Managers Index (PMI) was stronger at 59.2, up over 2 points since February.  New orders, backlog orders and employment all increased in the PMI report.

US Job creation sank below even the most pessimistic forecasts, the Labor Department reported last Friday.  Employers added just 126,000 jobs, half the 2014 average and the lowest in 16 months.  The jobless rate remained at 5.5%, but the labor force participation rate dropped to 62.7%, one of the lowest readings in decades.  Downward revisions for January and February totaled 69,000.

Fannie Mae reported that the share of survey respondents who stated that now is a good time to buy a home fell to 66% in March, while those saying that they’d buy if they moved fell to a survey low of 60%.  Fannie attributed this to “lackluster income growth.”

Canadian employers added 28,700 jobs in March, better than forecast.  The jobless-rate stayed at 6.8%.  Canadian housing starts jumped 25% in March to an annual rate of 189,708 beating forecasts of 175,000.  The rise was driven by multi-family housing units in urban areas.

Eurozone PMI slipped -0.1, but stayed at an 11-month high of 54.0 – still in expansion territory.  The Services sector gave up -0.1 point to 54.2.  Manufacturing production rose at the fastest pace since last May, according to Markit.  The Eurozone Producer Prices Index (PPI) rose +0.5% in February, stronger than the +0.1% expected.  It was the first monthly gain since September, leading some to hope that deflationary pressures are lessening.  France’s final March PMI dropped -2 ticks to 51.5, while the services component declined -4 ticks to 52.4 – but both remained in expansion (>50) territory.  German business optimism hit a 4-year high.

China’s consumer price index fell -0.5% in March for a year-over-year change of +1.4%.  The reading is below the official target of +3% and suggests that the central bank will consider more economic stimulus.  The expectation among Chinese investors of this forthcoming government stimulus has been identified as a primary cause of the recent explosion higher in China’s stock markets.

That explosion higher in the Chinese markets might look eerily familiar to US investors who lived through the Nasdaq Tech bubble of the late 1990’s:

in the markets

 

(sources: Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, stocksandnews.com, wantchinatimes.com, BBC, 361capital.com, pensionpartners.com; Figs 3-5 source W E Sherman & Co, LLC)

The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market.

Summary:

The US has led the worldwide recovery, and continues to be among the strongest of global markets.  However, the over-arching Secular Bear Market may remain in place globally even as new highs are reached in the US.

Because the world may still be in a Secular Bear, we have no expectations of runs of multiple double-digit consecutive years, and we expect poor market conditions to be a frequent occurrence.  Nonetheless, we remain completely open to any eventuality that the market brings, and our strategies, tactics and tools will help us to successfully navigate whatever happens.

Fig. 5

Fig. 5

*****************************************************

SITREP: n. a report on the current situation; a military abbreviation; from “situation report”.

*****************************************************

The very big picture:

In the “decades” timeframe, the question of whether we are in a continuing Secular Bear Market that began in 2000 or in a new Secular Bull Market has been the subject of hot debate among economists and market watchers since 2013, when the Dow and S&P 500 exceeded their 2000 and 2007 highs.  The Bear proponents point out that the long-term PE ratio (called “CAPE”, for Cyclically-Adjusted Price to Earnings ratio), which has done a historically great job of marking tops and bottoms of Secular Bulls and Secular Bears, did not get down to the single-digit range that has marked the end of Bear Markets for a hundred years, but the Bull proponents say that significantly higher new highs are de-facto evidence of a Secular Bull, regardless of the CAPE.  Further confusing the question, the CAPE now has risen to levels that have marked the end of Bull Markets except for times of full-blown market manias.  See Fig. 1 for the 100-year view of Secular Bulls and Bears.

Fig 1

Fig. 1

Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best.   The CAPE is at 27.2, up slightly from the prior week’s 27.1, and approximately at the level reached at the pre-crash high in October, 2007.  In fact, since 1881, the average annual returns for all ten year periods that began with a CAPE at this level have been just 3%/yr (see Fig. 2).

Fig 2

Fig. 2

This further means that above-average returns will be much more likely to come from the active management of portfolios than from passive buy-and-hold.  Although a mania could come along and cause the CAPE to shoot upward from current levels (such as happened in the late 1920’s and the late 1990’s), in the absence of such a mania, buy-and-hold investors will likely have a long wait until the arrival of returns more typical of a rip-snorting Secular Bull Market.

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate.  The US Bull-Bear Indicator (see Fig. 3) is at 53.7, down from the prior week’s 54.4, and continues in Cyclical Bull territory.  The current Cyclical Bull has taken the US and some of Europe to new all-time highs, but many of the world’s markets have yet to top 2007’s levels – particularly in the Emerging Markets area.

Fig. 3

Fig. 3

In the intermediate picture:

The intermediate (weeks to months) indicator (see Fig. 4) is Positive and ended the week at 32, unchanged from the prior week. Separately, the quarter-by-quarter indicator – based on domestic and international stock trend status at the start of each quarter – gave a positive indication on the first day of January for the prospects for the first quarter of 2015.

 Fig. 4Fig. 4

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), whether we are in a new Secular Bull or still in the Secular Bear, the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns.  In the Cyclical (months to years) timeframe (Fig. 3), all major equity markets are in Cyclical Bull territory.  In the Intermediate (weeks to months) timeframe (Fig. 4), US equity markets are rated as Positive.  The quarter-by-quarter indicator gave a positive signal for the 1st quarter:  US equities were in an uptrend, while International equities were in a downtrend at the start of Q1 2015, and either one being in an uptrend is sufficient to signal a higher likelihood of an up quarter than a down quarter.

In the markets:

For the holiday-shortened week, the Dow Jones Industrial Average recovered some of its losses from the previous week, gaining +0.48% to end the week at 17763.  The Nasdaq composite gained an identical +0.48% to close at 4886.  The LargeCap S&P 500 advanced +0.53% to 2066.  The MidCap S&P 400 and SmallCap Russell 2000 each notched larger gains of +1.47% and +1.92% respectively, continuing their recent outperformance.  Canada’s TSX rose +1.45%, reflecting better Energy and Mining prospects as oil and gold stabilized.

Oil benchmark West Texas Intermediate crude increased +$1.12 a barrel to $49.55, its third straight weekly gain.  Gold also recorded a third straight weekly gain, up +0.35% to $1202.50 an ounce.   Silver diverged from gold, however, giving up -1.30% to close at $16.75.

Around the world, Developed International had a small gain of +0.08%, but Emerging Markets surged +4.51%.  The most notable among the internationals were Germany’s DAX and Japan’s Nikkei, each managing to hold their recent highs with gains of +0.83% and +0.77%, respectively.  Brazil, very volatile recently, roared higher to the tune of +9.74% for the week

For the month of March, only the US MidCap (+1.6%) and SmallCap (+1.2%) indices gained ground, and they are the leaders for the 1st quarter as well, at +4.9% and +4.0% respectively.  Although the Dow 30 lost ground for the 1st quarter, at -0.3%, all other US and Canada indices recorded modest gains (S&P 500: +0.4%, Nasdaq: +3.5%, TSX: +1.9%).

Developed International and Emerging International groups followed the overall US pattern: down in March, up for the 1st quarter.  Developed International did particularly well, at +5.5% for the 1st quarter, buoyed by exceptionally strong German and Japanese performances.

In US economic news, pending home sales rose +3.1% in February, the highest level since June 2013 according to the National Association of Realtors—expectations were for a +0.3% gain.  Purchases were up +6.0% and refinances gained +4%.

Manufacturing activity increased in March as the Purchasing Managers Index (PMI) rose +0.6 point to 55.7.  PMI publisher Markit stated the report demonstrated “robust and accelerated expansion of manufacturing production levels.”

US Personal incomes increased +0.4% in February, slightly better than expected, and up +4.5% vs. year-ago levels.  However, consumer spending remained subdued with a mere +0.1% rise that missed expectations by a tick.  It appears that consumers aren’t spending the extra cash; they’re saving it.  In February the savings rate rose to a two-year high of 5.8%.

The biggest US economic news of the week came on the Good Friday market holiday: the March Non Farms Payroll (NFP) report.  The NFP report was shocking to all, with just 126,000 jobs created, basically half the number forecast and the first time in 13 months below 200,000. The unemployment rate remained unchanged at 5.5%.  Including downward revisions for January and February of 69,000 apiece, the average monthly gain in the first quarter was 197,000, down sharply from 324,000 in the months of the fourth quarter of 2014.  The 197,000 first-quarter average monthly gain, clearly weather impacted, was virtually identical to the 193,000 monthly average in the first quarter of 2014 – another brutal winter for large parts of the country.

There was one piece of good news in the March data, though. Average hourly earnings rose+ 0.3%, but are still at just a +2.1% annualized pace the last 12 months, which happens to be the same pace for the past half-decade (+2.0%/yr). U6, the figure for underemployment (including those looking for full-time work but stuck with part-time) fell to 10.9%, the lowest since August 2008.

Canadian industrial prices surged +1.8% in February as energy prices rose, handily beating the forecast for a +0.5% rise.  The Canadian trade gap fell to $C984 million from $C1.48 billion as energy exports surged +14.9%.  Total exports rose +0.4% and imports fell -0.7%.

In the Eurozone, the EU’s economic sentiment index rose 1.6 points to 103.9 in March, the 4th straight increase and the highest level since July 2011.  Sentiment among industry respondents improved to -2.9 from -4.6 previously.

The Eurozone consumer price index was -0.1% in March’s flash estimate, more than the -0.3% change for February, but still in deflation territory.  European manufacturing also picked up as the final March PMI was reported as 52.2, up 1.2 points over February.  New business grew at the fastest pace since April and exports the strongest since July.

The Eurozone unemployment rate dipped to 11.3% in February, missing expectations of a decline to 11.1%.  Greece and Spain had the highest jobless rates, 26.0% and 23.2%.  Youth unemployment across the entire Eurozone was 22.9%.

Lastly, the National Association of Business Economists (NABE) is currently forecasting GDP growth of 3.1% in 2015, stronger than the 2.4% achieved in 2014. However, a model used by the Federal Reserve Bank of Atlanta strongly disagrees – at least for the Q1 component.  The bank uses a model called “GDPNow” to prepare its forecasts.  GDPNow aggregates the same 13 subcomponents used by the government to construct its official GDP reports, but when a data point is not available, the GDPNow model uses “bridge equations” to fill the gap in order to get closer to a real time estimate.

The following chart shows that the Atlanta Fed’s GDPNow forecast is significantly lower than the so-called “Blue Chip” consensus of leading economists, and is widening.  The GDPNow Q1 GDP forecast hit 0.0% on April 1, and nudged up to 0.1% on Friday.

in the markets

GDP growth may not actually reach zero for the first quarter of 2015, but there seems to be solid evidence that it will end up below where the NABE and Blue Chip forecasts are currently putting it.

(sources: Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, stocksandnews.com, wantchinatimes.com, BBC, 361capital.com, pensionpartners.com; Figs 3-5 source W E Sherman & Co, LLC)

The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market.

The average ranking of Defensive SHUT sectors rose to 15.3 from the prior week’s 15.8, while the average ranking of Offensive DIME sectors fell to 17 from the prior week’s 15.  The Offensive DIME sectors have now lost their lead over the defensive SHUT sectors for the first time in 6 weeks.   Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

Summary:

The US has led the worldwide recovery, and continues to be among the strongest of global markets.  However, the over-arching Secular Bear Market may remain in place globally even as new highs are reached in the US.

Because the world may still be in a Secular Bear, we have no expectations of runs of multiple double-digit consecutive years, and we expect poor market conditions to be a frequent occurrence.  Nonetheless, we remain completely open to any eventuality that the market brings, and our strategies, tactics and tools will help us to successfully navigate whatever happens.

Fig. 5

Fig. 5