Week Ending 8/26/2016


Equity markets fell last week. US markets were down by about 0.55%, international by about 1%, bonds fell slightly (0.12%) and crude dropped 2.66%. The USD was up by 1.23% on the chance for higher interest rates earlier than expected. That has helped financials which have been a strong performer of late.

Performance 8 26 2016

A prolonged period of low volatility, a negative divergence of price performance versus technical indicators (see pink graphics below), price action that is slowing rolling over, and a calendar period (August to October) that sometimes, historically, has been unkind to stocks, might be a hint that there is the possibility of a small to modest sell off here.

SPY 8 28 2016

Interest rates rose 8 basis points on the 2-year note, 6 on the 5-year, 4 on the 10-year and 0 on the 30-year, as the curve flattened. Hawkish comments by Fed vice chair Stanley Fischer indicated that a rate hike is possible in September or December.

Treasury Rates 8 26 2016


The GDP estimate for Q2 was revised lower to 1.1% from the 1.2% advance estimate. That works out to real GDP growth of 1% in 1H, the slowest pace in three years. However, the Q3 estimates are tracking much higher.

The Atlanta Fed’s GDPNow forecasts Q3 growth at 3.4%, down from 3.6% last week. A decline in the forecast for Q3 real residential growth pushed the estimate down. The NY Fed’s Nowcast also declined by 20 basis points. Positive news from higher than expected new single family home sales was offset by higher than expected manufacturers’ inventories of durable goods (indicating subdued demand).

Jobless claims remain low, coming in at 261k last week, down by 1k.

China’s manufacturing PMI moved back into negative territory, although just barely. China is a wildcard that moved the market down significantly at the beginning of the year.

China Manufacturing has moved back into contraction


Week Ending 8 19 2016

A quick report as I was traveling all last week.


With the exception of oil, it was a quiet week all around. All of the equity markets were up about 0.10%, the bond index was down by 0.13%. The US dollar declined by 0.95%. Crude had a big jump, +9.06%.

Performance 8 19 2016

Treasury rates were slightly higher, up by between 5 to 7 basis points all along the curve.

Treasury Rates 8 19 2016


Jobless claims dropped by 4k to 262k. Claims have been consistent around the 265k area. These numbers are ridiculously low. This makes 76 straight weeks of sub 300k claims, the longest such streak since 1970 when the US population was 2/3’s the size of what it is now.

The Fed released their July minutes, leaving open September for a possible increase. The officials seem to have mixed opinions and the next increase will likely be in December. That would be after the election and still give the Fed the opportunity for at least one increase in 2016.

GDP estimates for Q3 improved. GDPNow is forecasting 3.60% growth (up by 0.10%) and the NowCast increased by 0.6% to a 3.0% estimate. Q3 is looking, at least so far, to be a much better quarter than Q1 and Q2.

Economy 8 19 2016


Last week we wrote about free trade and how the two Presidential candidates are politicizing trade to win an election, not to improve an economy. Barron’s has followed up with their cover story titled “Free Trade, Why it’s Good for America.”

The link to the article is here.


Week Ending 8/12/2016


It was another flat week as the US equity markets increased by about 0.13%. The story was better worldwide (x-US), gaining 1.79%. Bonds increased 0.41% as rates fell by about 9 basis points on treasuries that mature in 10 years or longer. The dollar fell by 0.55% and crude had a big rally, advancing 6.44%.

Performance 8 12 2016

On Thursday, all three major indexes (Nasdaq, SP500 and Dow) hit new highs. That was the first time that has happened since the last day of the last century, December 31, 1999. Despite that, there has been no big spike higher in US equities, the market has broken out from its recent range and has moved only slightly higher.

SPY 8 12 2016

What has been making a decent move higher are emerging markets. The chart below shows the VWO (Vanguard Emerging Markets ETF). The fund was up about 1.8% on the week and is up 16.7% on the year. Maybe emerging markets are up because on some valuation metrics, such as price to book, this is one area that is still reasonably priced on a historical basis compared to US equity markets. Or maybe, given US politics, Brexit, and other disconcerting geopolitical events, emerging markets don’t look so different from the more established developed markets!

The chart does show a negative divergence between the moving average convergence/divergence (MACD) indicator and the price action. The former is moving lower while the latter is moving higher. Sometimes that indicates a pullback is due.

VWO 8 12 2016


Retail sales came in flat for July, after have a nice increase in the prior months. The consensus was for a 1/2% gain, so the report was a disappointment. The slowdown hurt GDP estimates, and Q3 estimates for both GDPNow and the NowCast fell on the report.

Jobless claims remained steady, falling by 1k to 266k.

GDP Estimates 8 12 2016


Trump especially, but Clinton also, have been railing against free trade. The unfortunate part of all of this is that cutting back on free trade will hurt the majority of Americans. Free trade may not make good politics, but it does make good economics, and ultimately, free trade improves the economy, not hurt it. Specific, legitimate trade issues, such as theft of intellectual property or government subsidies, should be dealt with, but don’t take down the entire free trade infrastructure which has vastly improved economies around the world including here in the United States. Trade wars are dangerous, it has already been tried once, and it didn’t work out so well (read up on the Depression and Smoot-Hawley).

Read Dan Ikenson’s piece from the Cato Institute for more.


While interest rates have been falling just about everywhere else, The London Interbank Offered Rate (LIBOR) has been on the rise. LIBOR is currently 0.82% up from 0.33% a year ago. LIBOR rates impact costs for banks, businesses and individuals.  LIBOR costs are up because of money-market reforms that have pushed funds into government debt instead of LIBOR based debt. This is another unintended consequence of government regulation. As demand for LIBOR based debt has dried up, rates have increased. Short-duration bond funds should be benefactors but anyone with debt tied to LIBOR is now paying more.


Venezuela continues to violate every rule of economics as the Chavez/Maduro team further destroys the country. President Maduro now has turned to a Marxist professor from Spain for advice. Even most leftists now agree the country needs to open up the economy for any hope for positive change. But Maduro is going in the opposite direction, with the help of his new friend, Alfredeo Serrano. There will now be more state control, not less! Massive food shortages are the result of price controls and expropriations. Not according to Serrano, they are the results of “speculative capitalism” and companies hoarding products.

However, at the end of the week, Venezuela did make one good move, they announced they would open up their border with Colombia. That at least is one step in the right direction.

Crisis in Venezuela


Week Ending 8/5/2016


The overall US market as measured by the VTI was up 0.42% for the week. International markets were flat. Bonds declined as interest rates increased. The USD and crude were both up.

Performance 8 5 2016 - Copy

Equity markets got a big lift with another strong jobs report (see below). The SPY (SP500 ETF), which had been trading in a tight range between 215.60 and 217.35 since mid-July, attempted to push lower between Tuesday and Thursday. On Tuesday, the SPY closed 5 cents below that range, but on Wednesday and Thursday the bears could not follow through, and the market closed within its recent range. On Friday, the strong jobs number helped the market break higher, closing at 218.18.

SPY Chart 8 5 2016


Nonfarm payroll increased by 255k, making it two straight months of solid gains. The 255k was above the consensus estimate of 179k. The average work week increased by 0.1 hours to 34.5 and average hourly earnings increased by 0.3%.  It was a strong report and the Fed may have a hard time ignoring it when deciding on whether to increase rates or not. The numbers are not consistent with recent GDP data which showed growth of only 1% growth during the first half of the year. The Fed will have to figure out which data point better reflects economic reality.

ISM Non-Manufacturing fell to 55.5 from 56.5 in July indicating growth is continuing albeit at a somewhat slower pace than last month. The Markit US Services PMI flash reading rose by 1/2 point to 51.4, showing slight growth. Light vehicle sales had their best month since March of 2014, up 6.4% in July.

The Bank of England dropped its lending rate to 0.25%. That marks an all-time low in the Bank’s 322-year history. The Bank will also start buying corporate debt, all in an effort to counter Brexit.


The Atlanta Fed’s GDPNow came out with their initial reading for Q3. The estimate came in at a whopping 3.80%. We have a long way to go until we get final Q3 numbers, but a growth rate of 3.80% would be way above trend and a huge positive for the economy. The NY Fed’s Nowcast estimate for Q3 was a more modest 2.60%.

GDP Estimates 8 5 2016 - Copy


Earnings have been coming in better than forecast. On June 30th, the estimated earnings decline for Q2 was -5.50%. Currently, the blended earnings decline is coming in at -3.5% (according to FactSet). 86% of SP500 companies have now reported, 69% beat earnings estimates and 54% beat sales estimates.

At some point earnings (green below) will need to turn around and start moving up. The driver of most equity returns this year has been multiple expansion (purple below) with some help from dividends (blue below).

Equity Returns by Source


Increased Regulation

The WSJ reports that the Obama administration has just enacted their 600th major regulation rule, defined as a rule imposing costs of more than $100 million. The Bush administration wasn’t much better, they imposed 496 such rules. The American Action Forum calculates the total cost of these rules at $743 billion. If there has been one theme dating back decades it has been the growth of regulation in the US. If you are wondering why we have seen such lackluster growth since the 2008 recession, regulation might be a good place to start.


Demographics might be another reason growth is in slow motion. Nicole Maestas of Harvard University and David Powell of the Rand Corp. have published a paper showing that employees leaving the workforce to retire has a negative impact on productivity which harms the entire economy. The authors analyzed the impact of aging on the different states in the US and concluded that for every rise of 10% in the share of a state’s population over the age of 60, growth in per-capita GDP was cut by 5.5%.  A smaller labor force and the loss of experienced employees (impacting productivity) were the main drivers in the cut in growth. A possible solution would be to encourage people to retire later, not earlier.

The Hidden Impact of Aging


Here is another view on valuation. Geraldine Sundstrom of Pimco compares how “certainty” and “uncertainty” are priced. The blue line shows 10-year US treasuries, which now trade at about 65x earnings. Corporate credit, trades at about 35x, and the SP500 trades at 20x. Sundstrom writes that “[corporate] credit is likely to remain attractive, while the jury is still out on equities.” She thinks inflation expectations need to normalize and earnings need to recover to support equities, US treasuries remain an important diversifier, but that comes at an expensive price.

Paying Up

Week Ending 7/29/2016


The US equity markets were flat, but international markets advanced by 1.53% and the bond index managed a 0.44% gain. The US dollar dropped by 1.83% and crude took another hit and fell by 6.49%. July overall turned out to be a great month. The US markets were up almost 4%, international about 4.50% and bonds +0.55%.

Performance 7 29 2016

The SPY (SP500) ETF has traded in a tight range between $215.31 on the downside and $217.54 on the upside. That spread represents just 1.02% of the closing price on Friday. The Volatility Index (VIX) closed at 11.87, a ridiculously low number based on history.

We are now start August, which has been the worst month of the year over the last 20 years. The Dow has averaged a decline of 1.30% during that time period.

SPY 7 31 2016

Treasury rates fell by about 10 basis points from the 5-year bond on out in reaction to the lower GDP number (see below).

Treasury Rates 7 29 2016


In a shocking report, GDP grew 1.22% in Q2. That was way off the GDPNow estimate which was 2.4% last week and the NY Fed’s Nowcast which had growth estimated at 2.2%. GDPNow was revised lower earlier in the week to 1.8% but it was a miss that was simply unexpected. The consensus was for a 2.6% advance.

GDPNow July 29 2016

Of course, GDP might end up being revised higher (or lower) as more data comes in, but growth of 1.22% is a big disappointment. The number was hurt by a significant fall in inventories. The good news is that when businesses rebuild their inventory levels, that will provide a boost to GDP down the line. On the positive side, consumption increased by 2.8% for the quarter, the highest growth rate since 2014.

The GDP report must have even surprised the Fed, which earlier in the week indicated that an interest rate hike is back on the table. The Fed stated that “near-term risks to the economic outlook have diminished.”

Of late, economic reports have been coming in better than expected as evidenced by the Citibank Surprise Index that we posted a couple weeks back (click here).  But with the lower GDP number, with the possible slowdown from Brexit, geopolitical problems and the US Presidential election, economic risk to the downside is increasing.

Jobless claims rose to 266k, up 14k from last week. But 266k is a very low number, the labor market continues to be tight.

For Q3, the NY Fed Nowcast dropped only 10 basis points, showing respectable growth of 2.50%.

GDP Estimates 7 29 2016