Week Ending 7/22/2016


The US equity markets were up about 0.70%, international +0.28% and the bond index, +0.24%. The dollar continued to rise, +0.81% and crude oil continued to fall, -3.81%.

Treasury rates were down just slightly for 5-year maturities and up.


Consensus is moving back towards a rate hike this year. The Fed Bias Index is based on a modified Taylor Rule, the US unemployment rate and the Bloomberg Financial Conditions Index. The Bias Index now favors tightening. In addition, with the strengthening of financial markets and improved economic reports the Fed is going to be in a good position to hike rates, likely after the election.


The Empire Services Business Activity Index improved by 2.2 points, as service activity grew in the NY region. But optimism about the near-term outlook declines to its lowest level in 10 months.

The Markit Flash US Manufacturing PMI was up 1.6 points in July to 52.9, it was the biggest increase since August 2014.

Housing starts were up 4.8% in June. Architecture Billings Index was down slighty by 0.5 to 52.6, but still up from last year.

The Case Freight Shipments Index was up 1.7% in June, the fifth consecutive month, but was down 4.3% year over year.  Railcar loadings have also been heading up. Positive trending railcar loadings would indicate the economy is generating momentum.


GDP estimates remained the same this week.



Our report this week is shorter than normal as we had our quarterly webinar this weekend. We will send around the YouTube link next week.


It was a fairly quiet week in the US equity markets. Trading was in a tight range. Economic reports continue on the favorable side.


Week Ending 7/15/2016


It took 425 days by the SPY (SP500 ETF) hit an all-time high on Tuesday and finished the week higher by 1.50%. The VTI (overall US market) added 1.57% and the VXUS (international x-USA) was up 3.05%. This continues to be a market that hardly anyone believes in, and that may be enough to keep momentum positive. Market breadth (number of companies advancing versus declining) is solid and strong performance by the small caps all are all good technical signs. But the Dow transports are not near their highs. Market analysts like to see transports confirming the action of the overall market. The US dollar was up another 0.74% and oil was up 1.19%.

Performance 7 15 2016

Treasury rates went sharply into reverse. The general consensus going into last week was that rates were headed lower, thus providing fuel for equities to move higher. But that didn’t happen last week. Rates went higher across the curve.

Treasury Rate 7 15 2016


Interest rates have been declining for 35 years. Maybe we saw the bottom last week. As we wrote above, the consensus was that interest rates were still headed lower. But the market had none of it and interest rates reversed higher this past week after setting an all-time record low. The monthly chart below graphs the 10-year Treasury yield (symbol is TNX). After setting an all-time low, the TNX couldn’t hold it, setting up a “spring” (see our May 27th column). There was also a positive divergence with the “volume zone oscillator” (VZO). Notice the white circle in the bottom right of the chart. That sub-graph shows the VZO. The VZO evaluates volume in relation to the direction of the price change. In this example, when the yield on the TNX is moving lower, the VZO was moving higher, resulting in what is called a “positive divergence”. Some technicians would consider that a bullish signal that interest rates would move higher and that is what happened last week.


Of course, there is no technical indicator that is perfect and works all the time. In fact, all college students learn in Corporate Finance that according to the efficient market hypotheses, markets are “weak form efficient.” That essentially means that securities follow a random walk, and that future prices are not influenced by past prices. In other words, looking at technical charts doesn’t help traders or investors. Many people disagree with that hypotheses.


Retail sales advanced 0.6% in June, making it three months in a row. Year over year, retail sales are up 2.60%. Industrial production was up .06% in June, the most in nearly a year. But for the quarter, industrial production was down 1% annualized. Year over year industrial production is down 0.7%.

The Consumer Price Index rose 0.2% in June. Year over year, CPI is up 1.0%, but Core CPI (inflation x food and energy) was up 2.3%, the second fastest pace since 2012. Import prices declined 4.8%, year over year, led by drops in the price of fuel. The pace of decline has slowed over the last nine months. Overall, inflation remains under control.

Mortgage refinancing is up 80.3% year over year as borrowers take advantage of lower interest rates, the fastest pace since July 2012. The Freight Transportation Services Index was up 0.2% in May.

Economic reports have been surprising to the upside. The Citigroup US Economic Surprise Index measures how reports come in compared to consensus. After hitting a recent bottom on May 12, the index has been surging to the upside. Positive surprises in economic news will generally move markets higher and that has probably helped move the market to new highs.

Surprise Index


The Atlanta Fed’s GDPNow estimated Q2 growth remained steady at 2.4%. The NY Fed’s Nowcast estimate increased by 0.1% to 2.20%. The Nowcast estimate for Q3 moved up by 0.4% to 2.60%. It is very early to nail down the Q3 numbers, but right now the trend over the first three quarters of 2016 is going in the right direction.

GDP Estimates 07 15 2016


Job openings dropped for the first time in six months, falling 4.9% in May. Hires were down by 1%, the third straight monthly decline. Both declines are consistent with late cycle labor market activity.


The US Trade-Weighted Dollar Index is a measure of the value of the US dollar compared to other world currencies. The index was started in 1973 with a base value of 100. Today, the value is 90.62. The high this year was 95.80 in January. Between June 2014 and March of 2015, when the dollar was spiking, the index increased by 23%. Economists consider a 4% move in either direction as similar to a 25 basis point change in the interest rate. That would mean the 23% move would be equivalent to a 1.4375% increase interest rates. That move, coupled with the December rate increase, would have a net effect of higher rates of 1.69% since March of 2014, possibly help explaining the sluggishness of the economy and the hit to corporate profits. The worry now is that the dollar may strengthen further on Brexit fears.

Financial Conditions Would Tighten on Dollar Rise


That was the question in Kopin Tan’s Streetwise column in Barron’s this week. Tan notes that U.S. households have $14 trillion in debt but 7x more in assets including $26 trillion in cash and fixed income assets. Deutsche Bank strategists write low rates can be “a sizeable net tax, not a subsidy.”


The equity markets set a new high after 425 days. Ultralow interest rates helped that move, but rates have gone up over the last week. Economic news has been tilted slightly positive of late.

Pokémon Go

Apparently this is the ultra-hot new game, who would know?! A hint of what gaming will look like in the future.


Week Ending 7/8/2016


The market rocketed higher on Friday fueled by a big increase in nonfarm payrolls (see further below). The report signaled the economy continues in slow growth mode and alleviates fears that a recession is right around the corner. The SPY (SP500 ETF) was up 1.30% for the week, closing at 212.65, just shy of its all-time record of 213.50 on May 21, 2015.

Short-term investors are faced with a huge quandary here. On the one hand, the level of uncertainty around the world, which the market never likes, is at historic highs. The US economy appears steady in slow growth mode, but around the world, especially with the possible negative impact of Brexit, there is a greater threat of recession. In addition, while the US economy is not in recession, US large caps have been in an earnings recession going on five quarters now. The US presidential election increases the uncertainty level like never before. Based on traditional metrics, equities look overvalued. On the other hand, bond yields are at all-time lows, which make equities look inexpensive (see further below). Lower bond yields encourages investment in dividend paying equities. Uncertainty and negative interest rates overseas pushes investment into the US. The SPY is $0.85 away from hitting an all-time high and if it breaks through there is the chance for a further run higher. So there are lots of reasons why the market can break higher or lower in the near term, which might explain why it has been trading in an approximate range between 200 and 212 on the SPY for most of the last several months.

Political Uncertainty

Bonds were up 0.53% on the week, the US dollar rallied by 0.21% and crude fell by 7.31%.

Performance 7 8 2016

The 10-year hit another all-time low closing at 1.366%. The yield curve continued to get flatter.

Treasury Rates 7 8 2016

Using a model of the spread between the 10-year and 3-month Treasury rates the NY Fed projects the chance of a recession in the next 12-months at 8.10%.

Treasury Spread 10 year - 3 month


The market is as close as you can get to setting a new high. In six previous attempts, a failure to set a new high has led to a sell-off. In the event that the market does set a new high, a failure to hold the high, called an “upthrust” (described in our column on May 27), would signal a possible sell-off. However, the market has been trading sideways for a long-time now, and breakouts after such a long sideways trading period often indicate a pretty good move higher.

SPY 7 8 2016


Ben Levisohn writes in this week’s Barron’s that stocks, despite selling at a historically high P/E, look cheap on a relative basis. If you flip the price/earnings ratio of 16.7, you get an earnings yield of 5.99%. Subtract the 10-year treasury yield of 1.38% and the difference is 4.61 percentage points, close to the highest level of the last 15 years.

That spread, of course, is no guarantee that stocks are a no brainer buy here. As we have documented in this column in the past and up above, there are many arguments as to why the market is overvalued, including all of the traditional metrics such as price/earnings, price/book, etc.


Factory orders fell 1% in May. Nondurable goods were up 0.3% but durable goods were down 2.3%. Year over year, factory orders were down 2.5%. Light vehicle sales dropped 4.5% in June, year over year, they are down 2.0%. The ISM New York Current Conditions Index was up 8.2 points to 45.4 for June.


Nonfarm payroll jumped by a giant 287k in June, an eight-month high. That offset the weak May report which was revised lower to 11k. Jobless claims dropped by 16k last week to 254k. That was the fewest since mid-April and close to historic lows. Average hourly earnings were up 2.6% year over year, the fastest rate of increase in seven years. Taken all together, it looks like the low May nonfarm payroll report was a one-off and the labor market continues to be tight in the US. The unemployment rate increased to 4.9% from 4.7%, and back to where it was in January. The increase was mainly due to more people entering the job market.

Global PMI

Global PMI remained the same at 51.1 in June, indicating slight expansion. Most of the survey was done pre-Brexit. Manufacturing rose to 50.4 and services fell 0.1 to 51.3. During previous recessions, PMI has been less than 50. However, with uncertainty courtesy of Brexit and the US election, we are still on a global recession watch. The Eurozone composite was at 53.1. The US measured 51.2. Japan was at 49. Russia increased to 53.4.


Multiple British real estate asset managers put a temporary halt on investors taking money out of their funds. The British real estate market has been booming, but investors are worried that will go quickly into reverse. Many of the investors are foreigners, so declining real estate values doubled with the pummeling of the British pound could lead to a “run” on the funds. Contagion could lead to other sectors.


The Atlanta Fed’s GDPNow forecast for Q2 growth fell to 2.4% from 2.6% last week. The drop was due to a cut in second-quarter real consumer spending growth due to slower light vehicle sales. The forecast of the contribution of net exports also fell. The NY Fed’s Nowcast forecasts Q2 growth at 2.1%, unchanged on the week. Q3 estimated growth ticked up to 2.3% from 2.2%.

Economy 7 8 2016


The market is right there, knocking on the door of setting a new high. It has failed in six previous attempts, each of which led to a sell-off. The US economy continues in slow growth mode and solid payroll reports reduced recession fears over the next few months. Brexit is a potential problem as evidenced by the temporary closing off of several real estate funds in the UK.

Week Ending 7/1/2016


What a week! The market fell hard on Monday by 1.79% and then put in a blockbuster 4-day rally advancing 5.17%. For the week the SP500 (SPY) was up 3.34%, international (VXUS) advanced 4.16% and the aggregate bond index (AGG) was up 0.71%. The US dollar was flat and crude moved up by 3.12%.

While Brexit is a big deal, and while the uncertainty factor is sure to slow growth in the UK and maybe the EU, the market may have initially overreacted. At least for now, Brexit is a political not an economic event. And there was even some talk during the week that maybe the UK won’t even invoke Article 50, which would begin the withdrawal process, and give the EU time to reform itself. The EU would be wise to concentrate their union on the benefits of free trade and leave most of the other issues to traditional political negotiation.

Performance 7 1 2016


The 10-year Treasury note touched its lowest yield ever at 1.385% on Friday before closing at 1.46%. Let us emphasize “ever”. As in since the founding of the union. Led by fears of the impact of Brexit, investors are betting on more world wide stimulus and/or a weaker economy. Negative yields around the world are dragging down US rates.

Bank of England Chief Mark Carney said on Thursday that the bank’s expectation was slower growth as consumers and businesses react to uncertainty by cutting spending. Carney indicated that the central bank would cut its key rate over the summer. The yield on the two-year British government bond fell into negative territory for the first time after the comments.

10-Year Yield History10-Year Yield History Notes

Overall treasury rates were down on the week. The curve got flatter. The difference between the 2-year and the 10-year note declined by 6 basis points. The difference between the 5-year and the 30-year declined by 10 basis points.

Treasury Rates 7 1 2016

South Korea

South Korea announced a $17b stimulus package. They join Canada in using fiscal stimulus to get their economies going. Going forward, we will probably see more of this around the world.

Economic Reports

The Richmond Fed Manufacturing Index fell to -7 in June, its lowest level since January of 2013. The Texas Services General Business Activity index fell to -7.7. The near-term outlook declined.

The Chicago PMI came in at 56.8. That is the highest level in eighteen months represents a 13+ point increase over the last six-months. According to the Bespoke Investment Group, in seven of the eight previous times the index increased by that much in that time span, the economy was coming out of recession.

Chicago PMI

Personal consumer expenditures (PCE) were up 0.4% for May. The combined increase for April and May was the biggest two-month gain since August of 2009. Personal income was up 0.2% in May.

The Philly Fed State Leading Indexes, which are six-month projections of economic activity, show that 40 states are expected to expand, seven to contract and three to remain unchanged.

Pending home sales fell for the first time in four month, dropping 3.70%.

The Weekly Retail Chain Store Sales Index rose 1.5% last week. It is now up 3% from last year.

Initial claims for unemployment insurance rose 10,000 to 268,000. The four-week average is 266,750, that is close to the lowest level since 1973. The labor market remains tight.


Q1 GDP was revised up to 1.1% from 0.8%. The original estimate was 0.5%. The actual growth is now more than double the original estimate.

GDP estimates for Q2 and Q3 continue to remain stable. The Atlanta Fed’s GDP estimate for Q2 growth is 2.6% and the NY Fed’s Nowcast came in a 2.10%, both estimates were unchanged for the week. The NY Fed’s Q3 estimate ticked up by 10 basis points to 2.20%.

GDP 7 1 2016


The market reversed course on Monday and had a huge rally to close out the week. We are back to about where we started pre-Brexit. Estimated economic growth for Q2 is still projected at 2% plus, an improvement on Q1 and consistent with the slow growth mode we have been in for years.