The Secular Advisor – October 26, 2015
Economy – Additions & Updates
Additions – sentiment, manufacturing, leading economic indicators
Updates – employment, housing, gdp forecast
Asset Allocation – Additions & Updates
Additions – none
Updates – none
Economic Summary
Employment – initial jobless claims rose somewhat from a revised 256k to 259k, year over year trend: receding, however, job cuts have been in an upward trend since QE3 ended
Housing – housing starts bounced 6.5% in September, year over year trend: advancing, however, permits plunged to the lowest in 7 months, year over year trend: advancing
Sentiment – the Bloomberg economic expectations survey tumbled to 42.0, just above Sept. 2014 lows and almost as weak as during the 2013 government shutdown, 39% of respondents said the U.S. economy was getting worse, up from 36 percent in September. 23 % said it was improving, year over year trend: flat
Manufacturing – after hitting 2 year lows in Sept., the preliminary Manufacturing Purchasing Manager’s Index (PMI) printed 54.0 (above expectations of a small drop to 52.7), year over year trend: recessionary
Leading Economic Indicators – missing expectations for the 3rd month in a row, US Leading Economic Indicators (LEI) dropped 0.2% from last month, year over year trend: receding
Q3 GDP Forecast – 0.9%, year over year trend: receding
Employment
Initial jobless claims rose somewhat from a revised 256k to 259k.
However, job cuts have been in an upward trend since QE3 ended. PLUS, lower jobless claims and increased openings does not translate into a greater hires number. Those looking for a job today will quickly notice that companies post the same employment ads for months on end searching for the perfect candidate with lots of education, usually a bachelor’s and master’s degree (sometimes a PhD), and just a few years experience (so they can pay less while giving them zero latitude for input on business direction).
Low initial jobless claims is simply a reflection of “labor hoarding” which is when companies can’t find anymore employees to fire.
The truth is, the LABOR MARKET IS NOT AS GREAT AS MANY ECONOMISTS TODAY TELL US IT IS.
Housing
Housing Starts bounced 6.5% in September back to cycle highs.
In a continued search for yield, multi-family units (rental properties) represent a greater percentage of the upward trend in starts (and completions).
However, on a more forward looking basis, permits plunged to the lowest in 7 months. mainly due to a collapse in multi-family permits back to 2014 lows.
… and much like the bifurcated employment environment (plus stock prices vs. fundamentals) with a separation between openings and hires, the sentiment among home builders is manic compared to the reality reflected in permits.
NON-seasonally adjusted September Existing Home Sales fell 6.5% from August while seasonally adjusted rose 4.7%. The volatility in ’15 existing homes sales looks much like the late August volatility in stocks.
Sentiment
According to the latest Bloomberg economic expectations survey, 39% of respondents said the U.S. economy was getting worse, up from 36 percent in September. 23 % said it was improving.
Their National Economy Expectations tumbled to 42.0, just above Sept. 2014 lows and almost as weak as during the 2013 government shutdown.
Manufacturing
After hitting 2 year lows in Sept., the preliminary Manufacturing Purchasing Manager’s Index (PMI) printed 54.0 (above expectations of a small drop to 52.7). This is the strongest since May as both output and new orders surged as input costs fell. Some economists expressed that the October data indicated a “robust and accelerated expansion of production levels across the manufacturing sector.”
Leading Economic Indicators
Missing expectations for the 3rd month in a row, US Leading Economic Indicators (LEI) dropped 0.2% from last month. There has not been a bigger monthly drop since March 2013.
Q3 GDP Forecast
The FED’s GDPNow model forecast for real Q3 GDP growth (seasonally adjusted annual rate) was 0.9% on October 20, unchanged from October 14.
To learn more, visit Federal Reserve Bank of Atlanta’s website.
Asset Allocation Summary
Major Asset Class Allocations – 5% Stocks, 75% Bonds, 20% Cash
Int’l Developed Stock Allocations – 1.25% – Italy/Germany
Int’l Emerging Stock Allocations – 1.25% – Mexico/Indonesia
Int’l Emerging – BRIC Stock Allocations – 2.5% – Brazil/Russia
US Bond Allocation – 62.5%
Int’l Developed Bond Allocation – 2.5%
Int’l Emerging Bond Allocation – 10%
Asset Class Trends (for new allocation commitments)
Int’l Developed Stock Trend – bearish
Int’l Emerging Stock Trend – bearish
US Bond Trend – neutral (previously bearish)
Int’l Developed Bond Trend – neutral (previously bearish)
Int’l Emerging Bond Trend – bearish
US Dollar – neutral
Euro – neutral
Emerging Markets Currencies – bearish
OVERALL RECOMMENDATION – hold existing allocations / no new allocation commitments
Country Stock Fundamentals – Market Cap/GDP ratios (October)
Int’l Emerging – BRIC offers the best opportunity based on their weighted Mkt Cap/GDP value to overall GDP weights across the globe.
Int’l Developed
Int’l Emerging
Int’l Emerging – BRIC
Yields
Bond yields are falling across almost all economies.
The one major exception is Brazil which is experiencing both political and economic turmoil.
Dynamic Asset Class Expectations
Shiller’s 10 Yr. CAPE Ratio translates into a 2% 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 how the approach works (plus the back-test): link
US Stock Sector – Fundamentals
US Stock Sector – Allocations
To see how the approach works (plus the back-test): link
International Stock Allocations
When we look at Market Cap/GDP/Volatility (October), our most attractive countries are mostly emerging.
To see how the approach works (plus the back-test): link
Trends – Trade Execution – Utilizing Monthly Price Trends (& US Volatility)
The following tables enable entry and exit execution for new allocations.
US Stocks and Bonds
Stocks topped in July.
Bearish price / volatility trend is currently in place.
For bonds, the trend is neutral.
To see how the approach works (plus the back-test): link
International Stocks
The trend for Developed and Emerging remains bearish.
International Bonds
Developed bonds have turned neutral and Emerging remains bearish.
Currencies
The US Dollar is neutral, the Euro is neutral and Emerging Markets currency remains bearish.
Disclosure: None.
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