Stocks turned positive this week following the European Central Bank’s decision to use negative interest rates for funds on deposit with them.  Mario Draghi believes this will spur lending in the Eurozone and help head off the potential for deflation there.  In addition, a good May jobs number encouraged the markets that the US is recovering from its winter slowdown.  Treasury bonds fell this week as yields rose from their year to date low last week.  While economic signs are encouraging I am only cautiously optimistic as stock valuations remain high.  Second quarter earnings beginning in July will be telling as it typically gets harder for companies to increase earnings after several years of expansion.  Most notably this week:


  • US Auto Sales rose sharply in May recovering from the winter slowdown.  Toyota sales were up 17%, Chrysler up 17%, GM up 13% , Ford up 3% and Honda up 9%.
  • US Productivity fell 3.2% in the first quarter.  Severe winter weather was partly to blame as was an ongoing slowdown in efficiency gains.
  • The US trade gap grew 6.9% to a seasonally adjusted $47.24 BN in April.  From the previous year exports were up 3.0% and imports were up 5.4%.
  • The Institute for Supply Management reported that manufacturing activity rose to 55.4 in May from 54.9 in April.  Also ISM reported that nonmanufacturing activity rose to 56.3 in May from 55.2 in April better than expectations of 55.2.
  • The European Central Bank moved to stimulate the European economy moving its main lending rate to .15% from .25%.  It also lowered the interest rate on its deposit facility from 0% to -0.1% with the goal of getting banks to lend out their excess reserves.
  • US Retail Sales increased 4.4% in May this was largely believed to be a recovery from the winter slowdown.
  • 1st Time Claims for unemployment rose to 312,000 in the previous week.  This was slightly worse than expectations.  The four week moving average of claims fell to 310,250 the lowest since June 2007.
  • The Department of Labor reported that the US created 217,000 jobs in May, close to forecasts.   This is down from April’s gain, revised to 282,000.  The unemployment rate remained unchanged at 6.3%.  The total number of employed people finally surpasses the 2007 peak.  However, the composition of employment has shifted many to lower paying jobs than before the financial crisis.

Stocks rose this past week following stronger housing numbers.  Treasury rates also increased.  Target and Home Depot had disappointing earnings but blamed it on the weather.  Time will tell if sales rebound this quarter.


Significant economic data this past week include:

  • China’s Factory Activity improved in May to 49.7 up from 48.1 in April.  However, any number less than 50 represents contraction.
  • US Initial Jobless Claims in the prior week rose to 326,000 higher than economists’ forecasts of 310,000.
  • Existing home sales rose by 1.3% in April the first monthly increase of this year.  Existing home sales were 6.8% lower than a year ago.  Higher home prices and higher mortgage costs were cited as reasons.  Although 30 year mortgage costs have fallen year to date from 4.4% to 4.14% this past week they are still well above the 3.59% from a year ago.
  • New home sales rose 6.4% in April better than economists’ forecasts.
  • The Netherlands Bureau for Economic Policy Analysis, reported the volume of world exports and imports in March was 0.5% lower than in February.  For the first quarter as a whole, trade flows were down 0.8% on a quarterly basis, after a rise of 1.5% in the final three months of last year.


So I came home from work Tuesday and my wife, Carolyn, was watching the evening news.  She said, “I hear the market was way up today.”  The Dow was actually up 0.11% for the day.  I don’t blame her because every time it notches a “new high” it gets a lot of media hype.

So I frequently hear things like this, “Why do we have so much in cash?  The market just hit a new high.”  The logic in this statement fails to register with me.  The old adage “buy low sell high” seems to be replaced with “If I’m not all in at the peak I’m missing out.”  Yes the Dow hit a “new high” last week but it was only up 0.84% year to date.  At the end of the week the Dow was down year to date 0.51% the Nasdaq was down 2.06% and the Russell 2000 was down 5.52%.  A great rotation is taking place with sell offs in all the sectors that were previously hot; technology, biotechnology and small cap stocks.  Valuations are high and it’s been over two years since a 10% correction.  We are heading into the weakest time of year (May-June) and the weakest time of the election cycle (2nd and 3rd quarter before mid-term elections).  We have a Federal Reserve anxious to exit its unprecedented stimulus by September.  Inflation seems to be approaching the FED’s goal which may lead to short term rate increases sooner than expected.  While I’m positive on the US Economy and stocks over the medium term I believe risks are somewhat elevated right now.  This is not to say that a downturn is imminent.  We just need to exercise caution as risks are elevated
We are now two years into the Advance & Protect Strategy.  Our objective in using a tactical strategy is to limit the major market downturns while capturing most of the upside of the markets.  Losses are asymmetrical.  In other words it takes a bigger gain to recoup a loss.  The bigger the loss the bigger a gain needs to be to offset the loss.  For example, a 10% loss only needs an 11% gain to recover.  A 50% loss needs a 100% gain to recover.
Our goal is to protect capital during market downturns and capture growth during rising markets.  No tactical strategy is perfect, but over time if we have the discipline to follow it, I believe it will provide better risk adjusted returns.
Of particular interest this week:
  • US Household debt rose $129BN in the first quarter, mostly due to new mortgages and rapidly declining foreclosures.  Meanwhile, credit card debit actually fell $24BN to the lowest levels on record going back to 2003.
  • US Import prices fell 0.4% in April from March and were down 0.3% from one year ago.
  • US Producer prices rose sharply by 0.6% in April after rising 0.5% in March.  Over the past 12 months producer prices rose 2.1%.
  • US Consumer prices rose 0.3% in April and 2.0% over the last year.  In March consumer prices had risen only 1.5% from last year.  Excluding volatile food and energy consumer prices rose only 0.2% in April.
  • US Housing starts rose sharply in April by 13.2%.  However, single family homes increased only 0.8% while the remainder of the increase was due to multifamily housing.  This coincides with my belief that we are becoming a nation of renters.  Higher interest rates and home prices are slowing the demand for new homes.