Download October 2, 2015

In the markets:
The major market indexes were mixed as worries over China’s economic slowdown and potential new
rules in drug pricing gave way to a strong Friday afternoon rally that allowed many indexes to regain
positive territory for the week. The Dow Jones Industrial Average gained 157 points for the week to
close at 16472, a +0.97% advance. Large caps fared the best as the LargeCap S&P 500 gained +1.04%.
The MidCap S&P 400 declined -0.15%, and the SmallCap Russell 2000 declined -0.77%. Recent sector
losers - particularly Biotech, Energy and Basic Materials – all rallied hard into the end of the week.
Whether these turnabouts are dead-cat bounces or genuine bottoms will not be known for a while.
In international markets, Canada’s TSX declined -0.29%. In Europe, France’s CAC 40 lost -0.49%,
Germany’s DAX gave up -1.4%, while the United Kingdom’s FTSE gained +0.34%. In South America,
Brazil’s Bovespa Stock index rallied +4.9%, after being deeply oversold and deep in “Bear” territory.
In commodities, silver added +0.93% to end the week at $15.23 an ounce. Gold diverged from silver and
lost -$7.90 for the week, closing at $1137.60 an ounce despite a gain of $24.90 on Friday. A barrel of
West Texas Intermediate crude oil gained +0.71% to $45.66 a barrel.
For the month of September, losses were booked in every market segment, but LargeCaps did better by
far than SmallCaps. While the LargeCap Dow only lost -1.47% in October, the SmallCap Russell 2000
dropped -5.07%, cementing its position as the US market laggard at the ¾ marker of the year 2015.
International investors were not spared any pain, either, as Developed International retreated -4.42%
and Emerging International slipped -3.13% (with Brazil leading the Emerging category to the downside,
plunging -11. 78%). Gold and Oil were also down for the month, but by lesser amounts than many
recent months, at -1.80% and -7.61%, respectively.
The 3rd Quarter looked like a larger version of September, with losses across the board. Like September,
the LargeCap Dow and S&P indexes lost the least, at -7.58% and -6.94% respectively, while the SmallCap
Russell 2000 lost the most, at -12.22%. Canada’s TSX was in between, at -8.56%. Developed
International lost -9.72%, but that looks good compared to Emerging International, which sank -17.26%
during the Quarter. Brazil, the worst of the category in September, was also the worst of the Emerging
group for the 3rd Quarter, losing a whopping -33.02%.
In US economic news, Friday’s Non-Farm Payrolls (NFP) report was the biggest single economic piece of
news of the week. Nonfarm payroll jobs added in September were 142,000, nowhere near the 203,000
consensus estimate. The Labor Department reported that the official unemployment rate remained
unchanged at 5.1%. The labor participation rate fell to just 62.4% -- a 38-year low. Global economic
weakness and a stronger dollar were cited as reasons for the decidedly poor numbers. The report was
perceived as reducing the chance the Federal Reserve will raise interest rates this month. Last month,
the Fed held off on raising rates citing global economic concerns, and those concerns were not allayed
by any news since then – and most certainly not by the NFP report. Nonetheless, New York Federal
Reserve President William Dudley stated that the Federal Reserve will likely raise rates this year, as the
effects of cheaper oil and a stronger dollar play out. He reiterated that the Fed remains datadependent, and that the hike could even come at this month’s meeting.
US factory orders fell -1.7%, worse than the consensus estimate of a -1.3% decline. Durable goods
orders fell -2.3%. Ex-transportation, orders fell -0.8% in August. Consumers spent more than expected
as incomes strengthened and inflation remained tame. On Monday, the Commerce Department
reported that personal incomes rose +0.3% in August, just slightly below the +0.4% gain expected.
Spending was stronger than expected with a +0.4% gain in August. Core inflation rose +0.1% in August,
which is 1.3% higher versus a year ago.
Mortgage applications fell -6.7% last week, according to the Mortgage Bankers Association. Applications
to purchase were down -6% and applications to refinance fell -8%. Home sales declined as contract
signings fell -1.4% in the National Association of Realtors Pending Home Sales Index. This vastly missed
expectations, which had been for a +0.5% gain. The West was the only region to see a gain in August
home sales. The Federal Reserve is hoping a rebound in housing will offset the current decline in
manufacturing activity in the United States. Home prices in the S&P/Case-Shiller index declined -0.2% in
July. The 20 city index rose +5% for the year, slightly missing expectations. Dallas, Denver, and San
Francisco continue to see the strongest price gains. Overall, prices remain about 12% below 2006 peaks,
even while higher prices have been constraining more robust growth in the market.
Consumer confidence improved as the Conference Board’s sentiment gauge jumped to 103 from 101.3.
Expectations had been for a continued decline to 96. The “present situation” component of consumer
confidence increased to 121.1 from 115.8, but the “future expectations” component declined a half
point to 91.
The Institute for Supply Management (ISM) Manufacturing Index fell -0.9 point to 50.2, the lowest since
May 2013 and just barely above the 50 dividing line between expansion and contraction. ISM’s export
orders gauge remained at 46.5, matching the worst reading since July 2012. The Chicago Purchasing
Managers Index (PMI) fell into contraction at 48.7 from 54.4. Forecasts had been for a slight downturn,
but that the index would still remain in expansion (i.e., above 50). It was the PMI’s fifth time below 50 in
2015 and an accompanying note said “the speed of the September descent is a source of concern.” The
reading follows other regional contraction-level readings in New York, Philadelphia, Richmond and
Texas.
In Canada, industrial producer prices declined -0.3% in August, beating expectations of a -0.5% decline.
For the year, prices are -0.4% lower, led by a -14.8% plunge in energy prices.
In the Eurozone, a tiny bit of recent inflation has turned back into deflation. Consumer prices went
negative in September, falling -0.1% versus a year ago. It was the first negative reading in the six
months since the ECB launched a bond buying program. Expectations had been for an unchanged
reading.
Germany’s PMI was revised downward in September to 52.3. The average PMI for the months
comprising the third quarter was 52.5, the strongest reading in more than a year, but the lower reading
for September indicates a slowdown in momentum heading into the fourth quarter.
Finally, the general perception among many investors is that the place to find growth is in the Emerging
Markets, which presumably are expanding more rapidly than their developed-world counterparts.
Sometimes, this is a correct perception – such as during the Bull Market running from 2003 to 2007.
However, it has most definitely not been true for the last couple of years. In fact, growth has turned to
contraction in many Emerging Market countries, and the Manufacturing PMI readings for Emerging
Markets have fallen sharply into the sub-50 contraction territory. Stock prices, too, have reflected this
unhappy state, with most Emerging Markets indexes lower than their levels of 5 years ago. This chart,
from Markit, shows that the Emerging Market Manufacturing PMI is now at a 6-year low and back to the
same level reached in Q2 of 2009 when Emerging Markets were first exiting from the Great Recession.
(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; Figs 3-5 source W E Sherman & Co, LLC)