Economy – Additions & Updates

Additions – inflation expectations, housing, manufacturing, leading indicators, global inflation, global trade

Updates – employment, Fed GDPNow forecast

Asset Allocation – Additions & Updates

Additions – none

Updates – sector fundamentals ranks / allocations

Economic Summary:

Employment – initial jobless claims: risen for last 4 weeks, level: still at decade lows

Inflation Expectations – lowest since Lehman collapse  

Housing – sales: highest since Feb ’07, permits: plunge 16.3% 

Manufacturing – managers expectations: heightened uncertainty about demand

Leading Indicators – reading: weakest since March ’13

Q3 GDPNow Forecast – 1.7% (up from 0.7%)

Global Inflation – headline: lowest since Lehman collapse

Global Trade – rates: lowest since Lehman collapse

Employment

Initial jobless claims have now risen for 4 straight weeks, the first time since August 2010.

However, the level is still at decade lows.

Inflation Expectations

The last three times inflation expectations were this low, the Fed was about to launch QE1, QE2, Operation Twist and QE3. With expectations at their lowest since the Lehman Brothers collapse, do you really think there will be a rate hike in Sept?

Housing

SAAR Existing Home Sales data showed sales at the highest since Feb 2007.

The West and The South led with an increase in sales. In the Northeast, sales were falling.

With mortgage applications down, wage growth flat, the desire to rent vs own at multi decade highs, and employment growth concentrated in low-paying restaurant jobs, the question remains: how long can this upward price trend last?

Housing Permits plunged 16.3%, the biggest drop since June 2008, down to 1.119MM from 1.337M last month.

The plunge was driven exclusively in the Northeast as a result of an expiring property tax break in NYC . . .

Manufacturing

The Markit Manufacturing Purchasing Managers Index printed at 52.9 (vs 53.8 expected), the lowest in 2 years.

The report noted a weak production volume increase, survey respondent expectations for a slowdown in new business, and a heightened uncertainty about demand in August.

In response, several economists suggested a rate hike delay but also the possibility of QE4.

Leading Indicators

The Conference Board’s July index of leading indicators tumbled to -0.2%, the weakest since March 2013.

This business cycle index uses manufacturing, construction, stock, and bond market indicators to identify economic expansions, recessions, and recoveries.

Q3 GDPNow Forecast

The quantitative forecast for Q3 GDP growth is now 1.7%.

A seasonally adjusted 15.3% increase in motor vehicle assemblies was at the root of the increase from 0.7%.

Global Inflation

Headline inflation (including food and energy) in developed economies is at the lowest level since The Great Recession.

The Organization for Economic Cooperation and Development August 12th report on June data showed that headline inflation for member countries was just 0.6% year-over-year and for Major G7 nations 0.2%.

Note: U.S. Core CPI was running at 1.8% in June very close to the Federal Reserve’s 2% target.

Global Trade

For the third consecutive week, falling freight rates on the world’s busiest route are now nearly 60 percent lower than three weeks ago. The last time this happened was the Lehman Brothers collapse.

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.