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Manufacturing Churns Out Slow Growth In U.S. – ETFs In Focus

U.S. manufacturing is yet to recover from prolonged sluggishness. This was indicated by the recent manufacturing report from the Institute for Supply Management (ISM). As per ISM, the reading was 50.8 in April (a reading of 50 or higher points to growth), down from 51.8 recorded in March. Economists had forecast the index to decline to 51.4% (read: ETFs to Watch on U.S. Manufacturing Revival ). Though the latest reading has come in above 50 for the second successive month and was the second best number in the last eight months, the sequential decline may subdue investors’ optimism over the sector. New orders index to 55.8% from 58.3% in March. Huge capex cuts by energy companies to fight back the plunge in oil prices and still-sluggish export demand in the wake of global growth issues kept a check on the sector. However, investors should note that export orders touched a 17-month high. A comparable industry measure compiled by Markit also point to the same trend. Markit’s final U.S. manufacturing PMI fell to 50.8% in April from 51.5% in March. As per trading economics , input costs bucked the trend at the manufacturing sector as pressures building up lately defying the prolonged trend of decline. This was because raw materials’ costs crept up leading to higher input costs. However, output prices fell resulting in reducing pricing power. Market Impact Most of the industrial ETFs were in the green post release of the manufacturing data. ETFS like the PowerShares DWA Industrials Momentum Portfolio ETF (NYSEARCA: PRN ), the iShares U.S. Industrials ETF (NYSEARCA: IYJ ) and the Industrial Select Sector SPDR ETF (NYSEARCA: XLI ) added small gains on May 2, 2016 ( see all industrials ETFs here ). Bottom Line While the latest data was nowhere near impressive, it can be seen as a slowly improving trend. ISM Employment Index was 49.2% in April versus 48.1% registered in March, revealing that the decline in employment – this time for the fifth successive month — is finally slowing. ISM noted that out of the 18 manufacturing sectors under coverage, 11 logged growth in employment in April. On the other hand, the long-tottering energy sector might be on an upward trajectory in the days to come on an oil price recovery. This can spell optimism for the manufacturing sector as a whole. Moreover, the U.S. labor market remains healthy. This should also back consumers’ purchasing power, boost demand for goods and result in higher factory activity. A still-low interest rate environment in the U.S. should also favor the industry as the sector depends on interest rates for its operations. The scenario beyond the U.S. border should also gain steam on a huge round of monetary easing. In conclusion, we would like to note that a full-fledged recovery may take more time than previously envisaged. So, as of now, it is better to bet on our top-rated industrial ETFs PowerShares Dynamic Building & Construction ETF (NYSEARCA: PKB ) – a key beneficiary of the solid construction spending in the U.S. – and the First Trust Industrials AlphaDEX ETF (NYSEARCA: FXR ) . On May 2, 2016, PKB and FXR were up 1.52% and 0.44%, respectively. Both carry a Zacks ETF Rank #2 (Buy). Link to the original post on Zacks.com

Are You Considering ‘Sell In May, Go Away?’

One of the signs that a stock market may be transitioning from a bull to a bear? Participants dismiss exorbitant valuations , cast aside disturbing shifts in technical trends, disregard economic stagnation and scoff at historical comparisons. For instance, it has been 352 days since the Dow Jones Industrials Average registered an all-time record high in May of 2015. Since the 1920s, when the Dow has surpassed 350 calendar days without recovering a bull market peak, the index has dropped at least 17% on nine out of 11 occasions. On average, the Dow has succumbed to 30% bearish price depreciation. Adding insult to injury here is that the Dow has failed to hold 18000 since it first notched the milestone back on December 23, 2014. That was 499 days ago. Equally compelling? Five days earlier (12/18/2014) marked the Federal Reserve’s final asset purchase in its third round of quantitative easing (QE3). In other words, the stock market has been unable to make any meaningful progress since the Fed stopped expanding its balance sheet. (Note: This also lends credence to research that attributes 93% of the current bull market’s gains to the Fed’s electronic credit/asset purchase interventions). “Forget corporate earnings, sales, the global economy, technical analysis and history, Gary. You’ve got to be a contrarian here because this is the most hated stock market ever!” I’ve heard this claim dozens of times now. Ostensibly, a lack of excitement for stock assets should push stocks back to record heights and beyond. And there may be some truth to the declaration. After all, corporations have been the only “net buyers” for more than three months, as the other participants (e.g., pensions, hedge funds, “Mom-n-Pop” retail, institutional advisers, etc.) have been “net sellers.” On the other hand, according to the National Association of Active Investment Managers, investment sentiment sits at its highest level since April of 2015. Putting that into perspective? A contrarian who recognized the uber-bullishness last year may have exited the market near the all-time record highs for the Dow and the S&P 500 in May of 2015. Similarly, we may once again be at a point where bullishness is overextended. Granted, the S&P 500 might only need to rise 4% from current levels to register an all-time record. In and of itself, that is relatively impressive. Nevertheless, the year over year and year-to-date outperformance of the S&P 500 by the FTSE Multi-Asset Stock Hedge Index (affectionately known as “MASH”) is reason enough to be wary. We’re talking about the collective success of several key components like the SPDR Gold Trust ETF (NYSEARCA: GLD ), the CurrencyShares Japanese Yen Trust ETF (NYSEARCA: FXY ), the PIMCO 25+ Year Zero Coupon U.S. Treasury Index ETF (NYSEARCA: ZROZ ) and the iShares National AMT-Free Muni Bond ETF (NYSEARCA: MUB ). Click to enlarge Click to enlarge Three-quarters of S&P 500 corporations have reported Q1 2016 earnings. And according to the S&P Dow Jones Indices website, as reported earnings estimates for the S&P 500 (3/31/2016) are now $87.48. The trailing twelve-month P/E? 23.4. “In the era of ultra-low interest rates,” you insist, “it simply doesn’t matter.” Well, then, perhaps you should investigate the four bear markets that occurred in the 20-year period (1936-1955) when the U.S. had similar 10-year yields, yet price-to-earnings ratios that were half what they are right now. Here is one thing that should not be ignored. When precious metals like gold and carry-trade currencies like the yen outperform stocks over 5-6 months as well as one year – when long-maturity U.S. treasuries and Japanese government bonds are behaving in a similar fashion – “risk off” has the edge over “risk on.” Should you sell in May and go away, then? From my vantage point, just make sure you’ve got a comfortable cash/cash equivalent cushion to buy riskier assets at more attractive valuations down the road. Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.

Best And Worst Q2’16: Consumer Staples ETFs, Mutual Funds And Key Holdings

The Consumer Staples sector ranks third out of the ten sectors as detailed in our Q2’16 Sector Ratings for ETFs and Mutual Funds report. Last quarter , the Consumer Staples sector ranked first. It gets our Neutral rating, which is based on aggregation of ratings of nine ETFs and 15 mutual funds in the Consumer Staples sector. See a recap of our Q1’16 Sector Ratings here . Figure 1 ranks from best to worst all nine Consumer Staples ETFs and Figure 2 shows the five best and worst rated Consumer Staples mutual funds. Not all Consumer Staples sector ETFs and mutual funds are created the same. The number of holdings varies widely (from 16 to 115). This variation creates drastically different investment implications and, therefore, ratings. Investors seeking exposure to the Consumer Staples sector should buy one of the Attractive-or-better rated ETFs or mutual funds from Figures 1 and 2. Figure 1: ETFs with the Best & Worst Ratings – Top 5 Click to enlarge * Best ETFs exclude ETFs with TNAs less than $100 million for inadequate liquidity. Sources: New Constructs, LLC and company filings Figure 2: Mutual Funds with the Best & Worst Ratings – Top 5 Click to enlarge * Best mutual funds exclude funds with TNAs less than $100 million for inadequate liquidity. Sources: New Constructs, LLC and company filings Fidelity Select Automotive Portfolio (MUTF: FSAVX ) is excluded from Figure 2 because its total net assets are below $100 million and do not meet our liquidity minimums. Fidelity MSCI Consumer Staples Index ETF (NYSEARCA: FSTA ) is the top-rated Consumer Staples ETF and fidelity Select Consumer Staples Portfolio (MUTF: FDFAX ) is the top-rated Consumer Staples mutual fund. FSTA earns a Very Attractive rating and FDFAX earns an Attractive rating. PowerShares Dynamic Food & Beverage Portfolio (NYSEARCA: PBJ ) is the worst rated Consumer Staples ETF and ICON Consumer Staples Fund (MUTF: ICRAX ) is the worst-rated Consumer Staples mutual fund. PBJ earns a Neutral rating and ICRAX earns a Very Dangerous rating. 117 stocks of the 3000+ we cover are classified as Consumer Staples stocks. Procter & Gamble (NYSE: PG ) is one of our favorite stocks held by FSTA and earns an Attractive rating. Over the past decade, Procter & Gamble has grown its after-tax profit ( NOPAT ) by 6% compounded annually. Since 2008, PG has earned a double digit return on invested capital ( ROIC ) and over the last twelve months earns an 11% ROIC. In spite of revenue declines, Procter & Gamble has generated a cumulative $64 billion in free cash flow over the past five years. However, at current prices, PG remains undervalued. At its current price of $82/share, PG has a price-to-economic book value ( PEBV ) ratio of 1.1. This ratio means that the market expects PG’s NOPAT to only grow 10% over the life of the corporation. If Procter & Gamble can grow NOPAT by 3% compounded annually for the next decade, (half the rate of the previous decade), the stock is worth $94/share today – a 15% upside. The company’s 3% dividend yield also adds to the attractiveness of PG. Mondelez International (NASDAQ: MDLZ ) is one of our least favorite stocks held by ICRAX and earns a Very Dangerous rating. MDLZ was placed in the Danger Zone in late March 2016 . Despite impressive revenue growth, Mondelez has never generated positive economic earnings . In fact, since 2008, the company’s economic earnings have declined from -$763 million to -$1.3 billion. The company’s ROIC has declined from 7% in 2009 to 5% in 2015. As we pointed out in our Danger Zone report, MDLZ likes to push focus away from the deterioration of business operations by using misleading non-GAAP metrics that remove many standard operating costs. Worst of all, MDLZ is significantly overvalued. To justify its current price of $42/share, MDLZ must grow NOPAT by 10% compounded annually for the next 17 years . The expectations embedded in the stock price are simply too high considering the decline in profits and the corporate governance risk related to the company’s reliance on non-GAAP measures of performance. Figures 3 and 4 show the rating landscape of all Consumer Staples ETFs and mutual funds. Figure 3: Separating the Best ETFs From the Worst ETFs Click to enlarge Sources: New Constructs, LLC and company filings Figure 4: Separating the Best Mutual Funds From the Worst Mutual Funds Click to enlarge Sources: New Constructs, LLC and company filings D isclosure: David Trainer and Kyle Guske II receive no compensation to write about any specific stock, sector or theme. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.