Economy – Additions & Updates

Additions – ShadowStats unemployment rate, retail sales, industrial production, inventories

Updates – employment, wages, sentiment, Fed GDPNow forecast

Asset Allocation – Additions & Updates

Additions – none

Updates – none

Economic Summary:

Employment – openings: little changed, hiring: little changed 

Wages (Unit Labor Costs) – low growth  

Sentiment – majority believes economic conditions are getting worse 

Retail Sales – reading: meets expectations, year over year trend: recessionary

Industrial Production – reading: beats expectations, year over year trend: near recessionary levels

Inventories – trend: recessionary

Q3 GDPNow Forecast – 0.7%

Employment

Fed Chairman Yellen’s favorite employment survey, JOLTS, showed job openings were little changed at 5.2 million on the last business day of June. The job openings rate for June 2015 remained at 3.6 percent for the third month in a row. The number of hires was 5.2 million in June, little changed from May.

The underlying details on JOLTS reveals however the biggest increase in openings has been in low paid restaurant and hotel jobs. It also shows a mismatch between openings (waiters) and skills (MBAs) as reflected in the following chart.

ShadowStats Unemployment Rate 

The headline unemployment rate (U-3) is at 5.3%.

However, when you add long and short-term workers that are “discouraged” and out of work. the rate is north of 20% (depressionary).

The ShadowStats seasonally-adjusted SGS Alternate Unemployment Rate reflects current unemployment reporting methodology adjusted for SGS-estimated long-term discouraged workers, who were defined out of official existence in 1994. That estimate is added to the BLS estimate of U-6 unemployment, which includes short-term discouraged workers.

Wages (Unit Labor Costs)

In a sign that wage growth is not as healthy as maybe the Fed would like so they can go back to a normal monetary policy, unit labor cost revisions registered a 2.3% increase. Q2 was 0.5%. Is this supporting for a rate hike?

 

Sentiment

The Gallup economic sentiment number was unchanged at -18. 39% of Americans said the economy is getting better while 57% said it is getting worse.

August preliminary University of Michigan Consumer Sentiment slipped from July’s 93.1, the 2nd weakest print since November.

Business expectations hit 11 month lows.

Retail Sales

After missing expectations for the last 6 months, July retail sales printed a 0.6% rise, in line with expectations.

The year over year trend reflects recessionary levels.

Industrial Production

Industrial Production popped in July 0.6% (double the 0.3% expectations) however revisions were down.

The jump was due largely to auto production.

Year-over-year growth is at 1.3%, hovering near recessionary levels.

Inventories

The ratio of wholesale inventories-to-sales pushed back up to 1.3, its highest since the last recession.

Q3 GDPNow Forecast

The Fed has stated that inventory investment will subtract 1.7 from Q3 GDP growth.

The quantitative forecast for Q3 GDP growth is now 0.7%.

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.