The Secular Advisor – August 3, 2015
Economy – Additions & Updates
Additions – durable goods, Skousen B2B index
Updates – initial jobless claims, wage growth, housing, sentiment, GDP
Asset Allocation – Additions & Updates
Additions – none
Updates – yields, stock/bond/currency trends
Economic Summary:
Initial Jobless Claims – slight uptick
Wage Growth – small increase
Housing – pending home sales: falling, prices: falling month over month, increasing year over year
Sentiment – falling
Durable Goods – falling / recessionary
China Manufacturing – falling
Initial Jobless Claims
Initial jobless claims rose 12k last week to 267k but close to 42 year lows…
Housing
Following new home sales disappointment, pending home sales dropped 1.8% in June the biggest drop since Dec 2013. After 5 months of gains, and with median prices at record highs, it appears affordability is crushing hopes of any sustained ‘recovery.’
The 0.18% month-over-month decline in the Case – Shiller home price index is the biggest since July 2014, however annually, prices are increasing about twice as fast as inflation or wages.
Price increases may be leaving the middle class with little hope of owning and pushed the home ownership rate to 63.4%, the lowest reading since the first quarter of 1967.
Wage Growth
The quarterly increase in US wages was just 0.2% – a third of the 0.6% rise expected – and a low 2% increase Y/Y. This was off the 0.7% rise in Q1, the weakest US wage growth since records began in 1982 and subtracted from the September rate hike expectation.
Sentiment
Gallup’s Economic Confidence Index continued its gradual, downward slide, reaching -14 for the week ending July 26. This represents a 10-month low for the index.
Meanwhile, 39% of Americans said the economy is “getting better,” while 57% said it is “getting worse.”
…and how will this play out with equities…
Durable Goods
Durable Goods New Orders have now fallen 5 months in a row (after revisions).
… while ex-Transports remain in recessionary territory…
The Skousen business to business index suggests the US economy is weaker than headline statistics state.
GDP
Q2 GDP advance release came in at 2.3% below the consensus estimate of 2.5%. Quantitative GDPNow from Atlanta Fed’s 2.4% estimate was almost spot on.
But more importantly, Q1 ’14 and ’15 GDP numbers were revised up respectively, -2.1% to -0.9% and -0.2% to 0.6%.
“Print” is in green while “Revised” is in blue.
China
Manufacturing PMI final print came in lower than expected at 47.8, it’s lowest since July ’13.
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
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 is at 26.60 translating 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.
Disclosure: None.
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