Download December 25, 2015

In the markets:
In advance of the Christmas holiday, US stocks rallied in low-volume trading along with oil and other
commodities. The gains brought the large cap S&P 500 index back into positive territory for the year.
The Dow Jones Industrial Average gained 424 points to end the week at 17,552. The LargeCap S&P 500
gained +2.76%, and is now up 1.5% year to date. The MidCap S&P 400 and SmallCap Russell 2000
gained +2.97% and +3.01%, respectively. The Nasdaq composite rose +2.55%, ending the week at 5,048.
Canada’s Toronto Stock Exchange Index gained also, rising +2.3%.
Among European markets, the United Kingdom’s FTSE led the way up with a pop of +3.3%, Germany’s
DAX gained +1.1% and France’s CAC 40 advanced a less-robust +0.8%. In Asia, Australia’s ASX and Hong
Kong both gained +2%, but the Japanese Nikkei slipped -1.1% - its fourth weekly loss.
In commodities, crude oil rocketed over +9%, ending the week at $38.12 per barrel of West Texas
Intermediate crude oil. Precious metals also participated in the rally as Gold gained +1%, rising $10.80
an ounce to $1075.80 and Silver tacked on 2% to $14.38 an ounce.
In US economic news, the Labor Department reported that initial jobless claims declined by 5,000 to
267,000. The smoothed 4-week average rose slightly to 272,500, a 3-month high, but has held below
300,000 for most of 2015 after hitting a long-term low in July.
US average home prices have now officially surpassed their 2007 peak, according to Federal Home
Financing Agency (FHFA) report. Prices increased +0.5% on a seasonally-adjusted basis, according to the
report, which matched the median estimate of the 16 economists polled by Bloomberg. The FHFA’s
monthly index is now +0.3% higher than the level reached in March 2007. Nevada, Colorado, and
Arizona had the biggest increases.
The National Association of Realtors reported that existing home sales declined -10.5% last month to an
annual rate of 4.76 million units, the lowest annual rate in almost 2 years, which missed expectations by
a wide margin. Existing-home sales fell -3.8% versus a year earlier. NAR blamed the weak housing
numbers on a lack of supply. In contrast to existing home sales, new housing starts jumped in
November with single-family starts and permits hitting the highest levels in nearly 8 years. The
Commerce Department reported that new home sales rose +4.3% to a 490,000 annual rate.
The Commerce Department reported that US GDP rose at a 2% annual rate in the 3rd quarter. The US is
on pace for a 10th straight year of failing to achieve the desired 3% annual growth rate. Exports were
slightly weaker than previous estimates thanks to a stronger dollar, but business investment rose at a
9.9% rate - the best in a year. Consumer spending rose at a solid 3% pace on a stronger job market and
lower gas prices.
The Chicago Federal Reserve’s National Activity index declined last month to -0.3; the index is now
negative for the 4th straight month. The 3-month smoothed moving average of the National Activity
Index fell to -0.2, the lowest since the beginning of the year. The National Activity Index is made up of
indicators that attempt to show whether economic growth is above or below historical trends. The
production-related indicators fell further into negative territory. The employment indicators were
positive but declined. Consumption and housing indicators remained negative but improved.
In the United Kingdom, retail sales grew weaker than expected coming in at 19 according to the business
lobby group CBI. Expectations had been for a reading of 21. The British economy gained 0.4% over the
previous quarter. Year over year, GDP grew 2.1%.
In the Eurozone, consumer confidence improved to -5.7 beating estimates of -5.9. The index reached its
highest level since the summer and the latest reading is well above its long-term average. Producer
prices in Germany, Europe’s largest economy, declined -0.2% last month. Consumer goods declined 0.1% while energy fell -0.2%, and capital goods increased by +0.1%.
Finally, it’s that time of the year again. Each year, the best-and-brightest at every major Wall Street
investment firm present their highly-educated and generously-compensated prognostications for the
coming year. There are 22 such luminaries bearing the title “Chief Market Strategist” at well-known
firms like Goldman Sachs and Morgan Stanley. Each year they are asked to forecast what the stock
market will do over the next year. They have access to the best information, Ivy League-educated
economists, teams of analysts, and connected politicians. We can’t expect their track records to be
perfect, but surely these folks produce truly superior predictions…right?
Morgan Housel, a columnist at investing site The Motley Fool (www.fool.com), dug deep into the
numbers and what he found was disappointing, to say the least. The average S&P 500 forecast of these
experts was off by an average of 14.7% per year, a difference of more than 150% of the actual average
return of the S&P 500. Note too in the chart below that as a group the experts did not predict even a
single down year, instead choosing to always see a rising market. A blindfolded monkey with darts
would have been substantially superior to this august group – and would cost a lot less, too!
(sources: Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com,
ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance,
stocksandnews.com, marketwatch.com, wantchinatimes.com, BBC, 361capital.com,
pensionpartners.com, cnbc.com, FactSet; Figs 3-5 source W E Sherman & Co, LLC)