The Secular Advisor – July 27, 2015
Economy – Additions & Updates
Additions – inflation expectations, World trade, China electricity consumption & manufacturing
Updates – initial jobless claims, housing, sentiment, manufacturing
Asset Allocation – Additions & Updates
Additions – US only allocations, currency trends
Updates – none
Economic Summary:
Initial Jobless Claims – falling
Inflation Expectations – on target
Housing – existing home sales: expanding, new home sales: falling
Sentiment – falling
Manufacturing – falling / recessionary
World Trade – falling
China Electricity Consumption & Manufacturing – falling
Initial Jobless Claims
Initial jobless claims dropped 26,000 to 255k – its lowest since Nov 1973, increasing the odds of a rate hike.
Inflation Expectations
The five-year, five-year forward breakeven inflation rate, the preferred inflation rate measure when Bernanke was head of the Fed, is currently at 2.16, the high end of the 2015 range between 1.95 – 2.20.
This is still on the low end of the range going back to 2003 however above the Fed target of 2.0 and increases the possibility of a rate hike sooner rather than later.
Housing
Existing Home Sales soared to 5.49 million, the highest since early 2007.
The median existing-home price for all housing types in June was $236,400, which is 6.5 percent above June 2014 and surpasses the peak median sales price set in July 2006 ($230,400). June’s price increase also marks the 40th consecutive month of year-over-year gains.
Price gains were dominated by the $500 k plus range with low-cost home (under $100k ) seeing prices drop 2.6%
As supply continues to drop…
Despite exuberant existing home sales, new home sales crossed back below the 500k to 482k . . . the lowest since Nov 2014.
Sentiment
Gallup’s Economic Confidence Index is the average of two components: how Americans rate the current economy and whether they feel the economy is getting better or getting worse.
The current conditions score was essentially unchanged from the week prior at -5. This was the result of 25% of Americans saying the economy is “excellent” or “good” and 30% saying it is “poor.” Meanwhile, 39% of Americans said the economy is “getting better,” while 57% said it is “getting worse.”
This resulted in an economic outlook score of -18, slightly below the -16 from the week prior, and the lowest weekly average since the week ending Sept. 21, 2014.
Manufacturing
Despite a very marginal improvement (from 53.6 to 53.8), Markit US Manufacturing PMI remains stuck at 19-month lows…
and employment tumbled…
World Trade
As goes the world, so goes America and so when world trade volumes drop over 2% (the biggest drop since 2009) in the last six months to the weakest since June 2014, some say a US recession is imminent…
China
Chinese Electricity Consumption year-to-date grew at 1.3% year-over-year in June, the slowest mid-year pace in 30 years…
Under the surface weakness appears, confirmed by the lowest Manufacturing PMI print in 15 months.
Asset Allocation Summary:
Major Asset Class Allocations – 5% Stocks, 75% Bonds, 20% Cash
Developed & Emerging Allocations – 87.5% Developed, 12.5% Emerging
Developed Country Stock Allocations – Germany, France, Italy
Emerging Country Stock Allocations – 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 – bearish
Int’l Emerging Stock Trend – bearish
US Bond Trend – bearish
Int’l Developed Bond Trend – bearish
Int’l Emerging Bond Trend – bearish
Int’l Developed Stock Trend – bearish
US Dollar – bullish
Euro – bearish
Emerging Markets Currencies – bearish
OVERALL RECOMMENDATION – hold existing allocations / no new allocation commitments due to 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 going up across both developed and emerging economies.
Dynamic Asset Class Expectations
Shiller’s 10 Yr. CAPE Ratio is at 27.30 translating into a 1% 10 Yr. expected return on US stocks.
Dynamic Asset Allocation
The most attractive mix is position 1.
US + International Allocations
US Only Allocations
To see the dynamic asset allocation approach performance and how it works, go to . . . link
US Stock Sector Fundamentals – June data
US Sector Allocations
To see the fundamental sector approach performance and how it works, go to . . . 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 the international stock approach performance and how it works, go to . . . link
Trade Execution – Utilizing Monthly Price Trends (& 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
Neutral price / volatility trend is in place for stocks.
For bonds, the trend has turned bearish.
To see the trend and volatility overlay approach performance and how it works, go to . . . link
International Stocks
The trend has turned bearish for both developed and emerging market stocks.
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.
Comments
