Stock Market Analysis (6/10-6/14)
Stocks lost ground last week as the Dow, S&P 500, and Russell 2000 indexes all declined. Among the sectors, largest losses were taken in financial and technology stocks, the least in consumer staples and health care. Telecommunication service stocks were the sole gaining sector. A total of 944 stocks advanced while 2,243 declined, 221 stocks set new highs against 549 new lows. Weekly volume declined as prices fell. Commodities were mostly lower.
We are in a market which has advanced strongly year to date, and now appears to be struggling. Low interest rates were thought to encourage investments in homes and stocks, and to stimulate the overall economy. Suggestions that the FED might permit rates to rise have been a strong negative among stock buyers. Much attention has been directed to changes in industrial production, a very low only 0.04% month to month, and 1.6% year to year. Production of consumer goods actually declined by 0.07%, business equipment was only slightly better at 0.21% monthly and 3.3% annually, and trending down. NAICS manufacturing was almost flat, ahead month to month 0.16%. One of our favorite indicators, the ratio of coincidental to lagging indexes, peaked out around the end of the year and has remained a depressed 89.2 value.
Foreign trade is not inspiring to American traders and producers. In fact, U.S. exports with the world are off almost 5% from March to April. Of this, exports to Europe are down about 8%. One cause of our domestic swoon in equities can be observed in the Bloomberg Surprise charts, which clearly show major disappointments in expectations for industrial activity and business cycle indicators. There are many problems to go around. And we haven’t discussed political events here at home, which further undermine confidence.
Over the past month about $2.5 trillion in losses have occurred to global equities. Emerging markets were especially hard hit. The Japanese money print operation has widespread repercussions, causing countries to sell the dollar to support (buy) their own currencies.
Except for very low inflation (due to lack of activity by consumers) the economic scene is not appealing with respect to corporate profits, nor equities. But there are other considerations. Investors flee from bonds, as seen by two consecutive weeks of cash outflows from bond ETF and mutual funds. This was last seen in the fall of 2011. Professional opinion for bonds is especially negative, see five consecutive weeks of ETF selling. [A contrarian would take this as a “buy” indicator for bonds.] For stocks, we find equity fund inflows are strong, with about $189 billion collected year to date. Much of this went into foreign focus funds. [Again, the contrarian would take this as a “sell” indicator for stocks, and especially many foreign issues.]
Among professional short term traders, optimism diminished to a small degree, while it grew among smaller individual investors, whose bullish sentiment increased and bearishness declined. The professional advisers and newsletter writers were very bullish a few weeks ago, by a 32% margin, they remain bullish in spite of the declines, now by a 21% margin. This is not comforting.
Our leading stock risk indicators continue to project difficulties ahead. After a very strong 6 months advance, this is hardly surprising. The Japanese are already in a 20%+ bear market, and many European equities are trending down. This is a good time to review equity holdings and pare down weaker issues. Cash generated becomes available to make purchases at lower levels.
F James, Ph.D.
As you may know, our firm is celebrating our 40th year in the investment business. In managing funds we have diligently followed our research and risk analysis. How has this worked? US News and World Reports which had previously recognized us in the Conservative Allocation Category, more recently recognized our work in the Small Value (Small Cap) Category. To review their findings, just click here.
Bond Market Analysis (6/10-6/14)
After rising for 5 straight weeks, yields on U.S. Treasury Bonds fell last week. The yield on the 10 Year U.S. Treasury bond ended the week at 2.13% and the yield on the 30 Year U.S. Treasury bond fell to 3.30%.
The U.S. dollar fell a little over 1% against other major currencies this past week. Oil prices rose about $2 a barrel to end the week around $98.00. Gold rose about 1% on the week to end near $1388 per ounce. Commodity prices were basically flat to slightly lower on the week.
Gasoline prices are typically highest in the last two weeks of May and the first two weeks of June. This year has not followed this pattern so far. The highest average price so far in 2013 was reached in February of this year when the national average price was $3.72 for gallon for a gallon of regular gasoline. Currently the national average is $3.62 a gallon. This is well below the all-time high of $4.11 reached in July of 2008 but we could break that record if seasonal forces take hold again this year.
The Citigroup Economic Surprise Index actually improved slightly this past week; however, it is still down significantly over the past 6 months. The NFIB Small Business Optimism Index, MBA Purchase Applications Index, Jobless Claims, and Retail Sales reports all came in better than expected. The JOLTS labor survey, Industrial Production, and Consumer Sentiment Index reports were worse than expected. On balance, while some economic reports were better than economists expected recently, the actual results are uninspiring.
Good news on the employment front, we read that Wal-Mart is going on a hiring spree. The bad news is that the stores have mostly been hiring temporary workers. By hiring temporary workers, they do not have to pay for the same health benefits as full time employees. Wal-Mart also recently increased the number of hours part-time employees have to work before they qualify for health care benefits from 24 to 30 hours. Adding insult to injury, Wal-Mart employees had anywhere from 8-36% increases in health care premiums, causing many to forgo the insurance altogether. Some large grocery chains are said to suddenly requiring as much as 10 more years for retirement.
We found automobile companies to be attractive in our 2013 Economic Outlook and this has been a good area to overweight so far this year. Looking forward however, we find that incentives to buy new cars have been rising and are back to levels last seen in early 2011. Alarmingly, these incentives have not lead to material increases in new car sales over the past few months. U.S. car companies are still selling at reasonable levels of earnings but we will be closely watching developments in this sector.
Treasuries are especially attractive because of foreign distress; we note short term money in China recently brought in yields over 9%. Japan’s initiatives to cheapen their currency make their products more attractive, other countries less so. This forces foreign countries to support their own currencies to lessen harmful currency outflows. How do they get funds to do this? One way is to sell U.S. Treasury securities from their reserves, to the tune of $70 billion in April. Such sales have pushed yields higher, making the dollar more attractive.
Our indicators remain favorable for the bond market. The economy continues to weaken; typically this is favorable for bond investors. We continue to see opportunities for bonds and especially those of higher quality.
Matt Watson, CPA
F E James, Ph.D.
