Economy – Additions & Updates

Additions – spending, factory orders

Updates – jobs, housing, sentiment, GDP 

Asset Allocation – Additions & Updates

Additions – none

Updates – none

Economic Summary:

Jobs – payrolls: small increase, layoffs: large increase

Housing – vacancy rates: low (yet not historically lows)  

Sentiment – falling

Spending – falling 

Factory Orders – falling / recessionary

Q3 GDPNow Forecast – 1.0%

Payrolls

July nonfarm payrolls came in at 215K, modestly below the expected 225K and down from the upward revised June print of 231K, and down from the 260K in May, with the unemployment rate flat at 5.3%, in line with expectations.

 

Challenger Gray reported that in July there was a whopping 105,696, up 136% from the 44,842 job cuts in June, and the highest in nearly four years, or since September 2011, the last time there were more than 100,000 layoffs.

Worse, the July surge brings the year-to-date job cut total to 393,368, which is 34 percent higher than the 292,921 cuts announced in the first seven months of 2014. This represents the highest seven-month total since 2009,when 978,048 job cuts were announced amid the worst recession since the Great Depression. More than half of the July job cuts were the result of massive troop and civilian workforce reductions announced by the United States Army. The cutbacks will eliminate 57,000 from government payrolls over the next two years.

Despite employment improvements, Millennials are doing anything but moving out. Below is a chart showing that the share of young people (18-34) living with parents has held steady over the last half year.

 

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Housing

Rental demand is reflected by vacancy rates; low vacancy rates reflect high demand. Vacancy rates are low, but not at historic lows except in certain high-demand urban zones such as San Francisco.

 

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Sentiment

Bloomberg’s Consumer Comfort survey shows, the last 2 weeks have seen Americans views about their personal finances collapse at the fastest rate in 3 years – falling to 10 month lows and decoupling from stocks…despite near-record high stock prices.

Spending

According to Gallup data, July was the third month in a row in which the average American spent less than they did in the same month a year ago, confirming that the US economy is no longer growing. As the following chart shows of the 7 months in 2015, 5 have seen a decline in consumer spending year over year.

Factory Orders

For the 8th month in a row, US factory orders fell YoY. Down 6.2% in June, this is the longest streak of declining factory orders outside of a recession in history. MoM, factory orders rose 1.8% – as expected – the most since May 2014 but historical orders and shipments were revised lower. Much of the MoM gain was driven by a 21% rise in defense aircraft shipments. Inventories continue to rise leaving inventories-to-shipments ratios at cycle highs.

Q3 GDPNow Forecast

Quantitative GDPNow from Atlanta Fed’s model forecast for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2015 was 1.0 percent on August 6. The model projects that lower inventory investment will subtract 1.7 percentage points from third quarter real GDP growth.

Asset Allocation Summary:

Global Major Asset Class Allocations – 5% Stocks, 75% Bonds, 20% Cash

Developed Country Stock Allocations – 2.5% – Germany/France/Italy

Emerging Country Stock Allocations – 2.5% – Mexico/Indonesia/India

US Bond Allocation – 62.5%

Int’l Developed Bond Allocation – 2.5%

Int’l Emerging Bond Allocation – 10%

Int’l Developed Stock Trend – neutral (change from last month)

Int’l Emerging Stock Trend – bearish

US Bond Trend – bearish

Int’l Developed Bond Trend – bearish

Int’l Emerging Bond Trend – bearish

US Dollar – bullish

Euro – bearish

Emerging Markets Currencies – bearish

OVERALL RECOMMENDATION – hold existing allocations / no new allocation commitments (based on trends)

Country Stock Fundamentals – Market Cap/GDP ratios (April)

Emerging market stocks (Brazil Russia India China particularly) offer the best value.

Note: International Monetary Fund GDP numbers come out in April and October.

Developed & Emerging

Emerging & BRIC

Yields

Bond yields are falling across every country (except Brazil & India) on the heels of the commodity collapse.

Dynamic Asset Class Expectations

Shiller’s 10 Yr. CAPE Ratio translates into a 1% 10 Yr. expected return on US stocks.

Dynamic Asset Allocation

Based on efficiency, the most attractive mix is position 1.

US + International Allocations

US Only Allocations

To see a performance back-test of this approach and how it works: link

US Stock Sector – Fundamentals

US Stock Sector – Allocations

To see a performance back-test of this approach and how it works: link

International Stock Allocations

When we look at Market Cap/GDP/Volatility (April), our most attractive countries are mostly emerging.

To ensure allocations are higher quality means considering the elimination of countries with high volatility including – Russia, Turkey, and Brazil

To see a performance back-test of this approach and how it works: link

Trends – Trade Execution – Utilizing Monthly Price Trends (& US Volatility)

The following cyclical tables get to the heart of timing and when the trend in prices is optimal (bull) for buying.

US Stocks and Bonds

Bullish price / volatility trend is in place for stocks.

For bonds, the trend remains bearish.

To see a performance back-test of this approach and how it works: link

International Stocks

The trend for Developed has turned neutral and remains bearish for Emerging.

International Bonds

A bearish trend is still in place for both Developed and Emerging.

Currencies

A bullish trend is still in place for the US Dollar, bearish trends for the Euro and Emerging Markets currencies.