Year: 2014

Troubles in the Chinese real estate market are back and banks have reduced lending to the property sector, at the same time that many trusts are coming due. There were reports over the weekend of developers slashing prices on new homes in order to move inventory. Putting the stories together, it could mean developers are facing a cash crunch and may be forced to liquidate property. With trusts coming due, however, a decline in home prices would not be good news. The risk of a major financial crisis is ever present in China due to the huge buildup of debt.

For that reason, the Shanghai Composite was down more than 2.5 percent in morning trading before recovering to a loss of 1.75 percent on the day. European markets didn’t suffer in early trading, but it can take some time before European and American markets digest the news from China. The Chinese are most sensitive to the news, but if it looks like a more serious trend is underway, Europe and the U.S. markets will head lower.

To get an idea of how large the problem could be, last week the central bank of China allowed the yuan to fall in value. It was the biggest one-week drop since 2011, when fears of a real estate slowdown first became big news, and also marks one of the few reversals during a more than 2 year period of appreciation. That 2011 drop in the yuan was also around the time of the first U.S. debt ceiling debate, when the European debt crisis was in full bloom and when gold peaked above $1900 an ounce. The real estate market didn’t slow down for long though, as developers pushed into smaller cities in order to grow. Now it appears they have overdeveloped these cities as well, and the only solution may be a drop in prices.

The situation warrants concern because China is a significant driver behind global economic growth. Unlike Japan’s crisis in the 1990s, there is no one else to pick up the ball and pull the global economy along if China stumbles. The result of a crisis in China could be a global economic recession that reignites debt problems in Europe and sends the U.S. unemployment rate in the wrong direction. For this reason, it pays to keep an eye on China. They have avoided a major crisis since the early 1990s, when the yuan was devalued by 60 percent, but this is the riskiest situation since 2008 and they will not be able to use another stimulus/lending policy to bail themselves out as they did in 2009.

Economic Reports: This is a light week for economic data. The big story of the week is likely to be Janet Yellen’s Senate testimony on Thursday.

New home sales on Wednesday will be closely watched, but weak housing data in recent weeks was ignored by the home builder stocks, which suggests investors are looking ahead to more favorable data. We’ll see if they get it this week.

On Friday, the most important data point for the week will be out: the revised GDP for the fourth quarter of 2013. Friday will also see the Chicago PMI and University of Michigan consumer sentiment for February, along with pending home sales from January.

Earnings: Earnings season is trailing off, but there are still a number of retailers reporting this week. Home Depot (HD), Macy’s (M), Best Buy (BBY), Lowe’s (LOW) and Target (TGT) are among them.

U.S. stocks ultimately traded sideways this week after a push higher on Tuesday, a drop on Wednesday and a recovery bounce on Thursday. The Nasdaq remains the stronger of the major indexes, with a small gain coming into Friday. On another positive note, the Russell 2000 hit a new high for the week on Thursday.

Economic data was negative overall for the markets this week. The one bright spot was the U.S. PMI, which climbed to 56.7 and beat expectations of 53.6. A number over 50 signals expansion, which is very good news for our long-term outlook, as manufacturing is a leading index. An upturn or downturn in the manufacturing sector can take more than a year to filter through the economy.

Additionally, the strong manufacturing number is important for the markets as it means the Fed is likely to stay the course on the taper. For that reason, we are placing more weight on that PMI number than on the slew of negative data that came out. The worst number was probably the Chinese flash PMI for February, which shows their manufacturing sector in contraction.

Housing data was weak as well, but that didn’t dent the home builders, which have traded roughly in line with the broader market. Biotechnology and solar pushed higher, but they showed signs of losing steam. Facebook’s (FB) purchase of WhatsApp for $19 billion dented the previously strong social media space, but in general internet funds continued to push higher.

Between the relative strength in the small cap index and the NASDAQ, plus subsector strength in internet, biotech and solar, the overall picture remains bullish. Nevertheless, another small pullback today or next week looks more likely than it did a few days ago.  The momentum pushing the leading sectors higher is slowing, which from a technical standpoint, could indicate some resistance over the short-term.

Finally, gold and silver miners remain among the sectors to watch in 2014. It looked as though we’d get a retrenchment this week when shares dipped on Wednesday, but they came roaring back on Thursday. A healthy pullback on the order of 10 percent would be nice to see (large miners are up about 25 percent so far and junior miners up 40 percent) for those looking to enter the sector.

We have made several changes to the ETF Aggressive Sector Portfolio.  Effective February 15^th, we sold iShares Health Providers (IYH) and reinvested the proceeds in Fidelity MSCI Healtcare (FHLC).  We still favor the healthcare sector FHLC has greater diversification across healthcare subsectors.  Relative to its peers, it also maintains a very low expense ratio of 0.12 percent.  We also sold half of iShares Consumer Goods (IYK) and reinvested the proceeds equally between Technology Select SPDR (XLK), iShares Industrial (IYJ) and FHLC.   

The S&P 500 and Dow Industrials are headed for a second straight positive week as they dig themselves out of the January correction. The rebound hasn’t been helped by economic data though, which continues to give bears reason to believe there could be more weakness in the market.

Through Thursday, the S&P 500 Index has gained 1.8 percent. The market was pulled higher by technology, utilities, healthcare and industrials, while consumer staples and consumer discretionary lagged. The gain in technology was notable, impart due to the minimal impact caused by Cisco (CSCO), which delivered a negative report. Shares initially dropped, but overall strength in tech helped pull the sector back towards. With a strong day in the markets on Friday, even Cisco could move back into positive territory.

On the negative end of the spectrum were consumer sectors. Retail sales slumped in January and jobless came in higher than expectations. The most commonly cited blame for the weak results was the weather, but this is a stretch seeing as the economic impact of Hurricane Sandy was unnoticeable in national statistics. Many economists predicted an impact from Sandy, but the economy powered right through it. Additionally, one of the areas that saw an increase in sales was gasoline, which contradicts the theory that snow kept people away from stores. That doesn’t mean bears are right to extrapolate a weakening economy, rather economists need to come up with better reason for being wrong in their forecasts.

The one point of strength for the bears is technical in nature: this latest rally has seen declining volume and the market has reached important short-term support/resistance levels. In other words, if this February bounce is a short-covering rally, we will know within the next few days.

As for the biotech and solar sectors that we monitor, some biotechnology indexes did break out to new all-time highs this week. Solar still needs to rally about 5 percent to hit its old high. The big winners in 2014 thus far have been gold and silver miners, as they benefited from the market rally coupled with weak economic data. When investors are optimistic and expect the Fed to extend or increase quantitative easing, precious metals can do well. Coming off a disastrous 2013, they have plenty of ground to recover.