April 2012
April 27, 2012 04:20 p.m.
Your Retirement Finance Week in Review
Big decisions soon need to be made by policymakers and investors. As I’ve said the last few weeks, a wave of economic and market forces are coming together and forming a critical mass that’s creating a lot of stress on the system. It’s not too late to register for my next free online investment presentation in which I’ll explain the situation in detail. I’ll put all these factors in context in “Today’s Big Test for the Global Economy and Central Banks.” The webinar is scheduled for Wednesday, May 2, at 3:30 p.m. eastern time. Spaces are limited. To reserve yours, contact TJT Capital at info@tjtcapital.com or 877-282-4609. I discuss my webinars in my role as Managing Member of Carlson Wealth Advisors, LLC and its relationship with TJT Capital.
The big news in the last week came from the Federal Reserve’s regular meeting. It announced no real change in its policies and continues to expect interest rates will remain near zero until some time in 2014. It also believes the recent rise in inflation was temporary, so there won’t be pressure to reduce stimulus. But the Fed also will let the latest stimulus fade as planned during June and doesn’t have specific plans to add new stimulus. As the doctors say, it will watch and wait.
Almost as important was the news from Europe. The government of the Netherlands essentially dissolved because it couldn’t agree on fiscal policy. The debt problems of Spain resurfaced in a big way. The situation in Spain is dire, with high debt levels, high unemployment, and other problems.
Investors don’t seem worried about either of these developments. Stocks rose the day after the Fed’s announcement and continued to rise. The rise in stocks also occurred as the news from Europe became worse. Corporate earnings reported were relatively good, and investors apparently were focused on those.
I expect stocks are due for a stronger correction than they’ve had. There was only about a 5% correction after the strong run from October 2011, and stocks still have strong positive returns for the year.
The Data
As economic data is published in coming weeks, one continuing debate will be how much the recent data were distorted by mild winter weather in much of the nation. Were retail sales, auto sales, home sales, housing starts, and other activity pulled forward from later in the year by the mild weather? We won’t know until the year’s data are in, but it’s worth thinking about and should make you more cautious than the raw data might.
The big number of the week normally would be the GDP report, but investors yawned at it. GDP growth for the first quarter came in below the previous quarter’s and below expectations. Yet, it didn’t seem to affect investors. The details in the report were worse than the headline number. Personal consumption rose and was a major reason for the GDP growth. But incomes didn’t rise to match spending. Savings declined and some credit use increased. At the same time, business investment declined. Growth can’t be sustained if these trends stay in place.
New unemployment claims disappointed in the last few weeks. Steadily declining claims were a leading cause of optimism about the economy and job market the last few months, so observers aren’t happy to see the new claims trending modestly higher. They now are at a four-month high.
The Index of Leading Economic Indicators was modestly higher. It was less than the previous month but slightly higher than expectations. But several positive factors in the index (new unemployment claims and stock prices) have since turned down, and higher building permits might be artificially higher because of the weather.
The housing data delivered another round of mixed signals from housing. The Case-Shiller Home Price Index showed a modest overall price increase for the latest month. That raised the 12-month decrease to 3.5%. The FHFA House Price Index, on the other hand, was up and now is up 0.4% for last 12 months. There are differences in how the two indexes are computed, with the Case-Shiller index being deliberately more stable and conservative.
New home sales were slightly less than expected, but last month’s number was revised sharply upward. Pending home sales (which measures contract signings) jumped sharply. But over the last few years this number’s been a notoriously poor predictor because of a high percentage of contracts not going to closing.
The NAHB housing market index declined after seven months of increases. All factors in the index declined, including buyer traffic, which is considered an indicator of future activity. Housing starts were down and below expectations, but permits issued increased more than expected. Existing home sales also declined and came in below expectations. The average home price increased 4.9%. This is primarily due to a change in the mix of homes sold. Fewer condos and other lower-cost units were sold compared to single family homes.
The bottom line on housing is that it’s not going to propel an economic boom any time soon. It is bouncing along the bottom. Negative factors are weak household incomes, difficulty in obtaining mortgages, and a largely supply of homes.
Retail sales increased much more than expected, and much higher than expected auto sales were a big factor. Sales, however, were strong almost across the board. Higher gasoline and auto prices possibly inflated the number somewhat, and strong building materials sales sparked a debate about the effect of weather on economic data. But it’s clear households reduced savings and increased credit use to spend more than they earned.
Manufacturing’s been an important contributor to growth since the 2009 bottom, and there are signs it is stabilizing at a lower level. The Empire State Manufacturing Survey, Philadelphia Fed Survey, and Chicago Fed National Activity Index all showed growth but at much lower rates than in recent months. The outlier was the Richmond Fed Survey, which showed higher growth than anticipated. Industrial production was reported as unchanged while durable goods orders declined sharply, after last month’s number was revised down. Capacity utilization declined slightly.
I think what we’re seeing is an economy that’s reducing its growth from the strong rate of the last quarter of 2011 and first months of 2012. We might settle into a modest 1% to 2% growth rate, or the economy could fall of the cliff without monetary stimulus as it did in 2010 and 2011.
The Markets
The markets were very volatile the last two weeks as investors try to adjust to changing economic data and the latest news from Europe. For most investments, the result has been little net change following a lot of movement. There have been opportunities for traders, but not for investors.
Long-term treasury bonds were flat last week but soared on Monday the 23rd to a 1.5% gain for the week. But they gave up much of that gain to record a slight gain for the week. High yield bonds were one of the top performers during the period, returning about 1% before considering interest payments. Investment-grade corporate bonds and TIPS were close to flat for two weeks.
The dollar had a slow, steady decline, finishing with close to a 2% loss for two weeks. Gold was perhaps the most volatile asset. It declined steadily, losing over 2% through early Monday. But it recovered the last few days to register a small 0.5% gain for two weeks.
Stocks bounced up and down, but U.S. stocks finished strong. Last week both U.S. and emerging market stocks marched together, closing down sharply lower Friday the 20th. U.S. stocks steadily increased this past week. Small company stocks closed almost 4% higher for two weeks, while large company U.S. stocks were a bit behind with a 2.5% gain. Emerging market stocks didn’t fully participate in the recovery, finishing with a 0.5% gain for two weeks.
Commodity prices were almost as volatile as gold, but had different results. Broad-based commodities had strong returns the last few days and finished with slightly more than a 1% gain for two weeks. Energy commodities didn’t do as well but finished with almost a 0.5% gain.
Investors now must consider whether close of Friday the 20th marked the end of the recent correction or the last three days of gains are a pause in the correction.
Some Reading for You
JP Morgan issued a report asking seven questions about recent market behavior. It’s an important exercise for investors to take. Don’t’ just follow the trends or crowd. Ask why markets are doing what they’re doing. The report was summarized in The Financial Times.
Another useful study JP Morgan did recently was to sift through public filings of life insurance companies and develop a composite portfolio of how they’re invested. I’ve long believed that insurers and retirees have similar risk profiles and should have some overlap in their portfolios. Read the highlights of the study here.
There’s a new housing bubble, and it’s probably not what you think. Read about it here.
I comment on these items and more on my public at http://www.bobcarlson.net.
April 13, 2012 04:20 p.m.
Your Retirement Finance Week in Review
A wave of economic and market forces are coming together and forming a critical mass that’s creating a lot of stress on the system. That’s why my next free online investment presentation is so timely. I’ll put all these factors in context in “Today’s Big Test for the Global Economy and Central Banks.” The webinar is scheduled for Wednesday, May 2, at 3:30 p.m. eastern time. Spaces are limited. To reserve yours, contact TJT Capital at info@tjtcapital.com or 877-282-4609. I discuss my webinars in my role as Managing Member of Carlson Wealth Advisors, LLC and its relationship with TJT Capital.
Next week I’ll be traveling. So there either won’t be a review or there will be only a brief one.
This was an extraordinarily wild week in the markets, and it generally wasn’t due to the data. There wasn’t much data issued this week, and there weren’t a lot of surprises in that data. Three factors moved markets this week.
U.S. markets were closed last Friday. There was built up investor reactions to last week’s employment reports and also to a deterioration in the financial condition of Spain. That combination caused a big market tumble on Monday and Tuesday.
As you know, the monetary stimulus programs from the Federal Reserve and the European Central Bank are winding down. This is causing economies to slow. This week, officials from the Fed tried to counter this with a series of speeches. At least nine senior Fed officials made public speeches this week. Ben Bernanke and Charles Plosser each spoke twice. The themes of most of the talks were that investors and businesses don’t need to worry. The Fed will step in with more liquidity whenever it is needed and plans to keep interest rates near zero through at least 2014. Some went as far as to say that the economy has self-sustaining growth now and that a greater concern is inflation.
My expectation is that the rapid growth rate of the first quarter of 2012 will gradually slow through the year. Absent a major event, I don’t see either a recession or strong growth. Investors will have to adjust to slow growth and negative surprises in the data. So there’s likely to be a market correction of 5% to 10%. I hope we can avoid the sharp declines that occurred in 2010 and 2011. Those were accompanied by major exogenous events, such as the Greece debt crisis and Japanese tsunami. I’m preparing for a good buying opportunity
The Data
Before we turn to the U.S. data, we consider the latest report from China. Its growth slowed to 8.1%. This was lower than expectations and the lowest rate since the first quarter of 2009. The data also accompany political change and turmoil in the country, which I’ve been documenting on the public blog. Since China’s been a major driver of global growth and especially emerging market growth, this is a major concern to investors.
Late last week the consumer credit report was released. It showed reduced credit use by households after surging late in 2011. Credit is needed for the economy to grow faster than incomes. Recent credit growth was focused in three areas: student loans, autos, and credit cards. The student loans are almost all federally-guaranteed or subsidized and have been excessive since the financial crisis. Their growth rate is slowing and is likely to slow more. The increased auto loans is a good sign. It shows consumers are able to borrow and will do so for long-lived assets. But it also could be a bit of a bubble because of pent-up demand from the last few years. I’m curious to see if this is sustained. The credit card use shows confidence by consumers in their incomes. The credit use still is at very low levels relative to historic averages and to bubble peaks, and declined in the latest data. The increase from the bottom is a sign of a slowing healing economy that probably has enough momentum for below-average growth, barring any new shocks. The recent decline in credit card use could be a pause but also could be a sign of rising consumer caution as the effects of the winding down of the latest monetary expansion are felt.
The NFIB issued its monthly survey of small business owners with mixed results. Small business optimism declined after a number of months of rising. Even after the recent increases, the optimism index still is well below historic averages. The weakest part of the report was the hiring picture, which is consistent with recent dips in other employment reports. Other parts of the survey, such as sales and profits, also declined or were flat. But the negative aspects of the report all were modest. I suspect they also are the beginnings of the effects of the winding down of the Fed’s latest stimulus.
The Fed issued its Beige Book Wednesday with no real surprises. It showed strength in manufacturing and overall moderate economic growth.
The only employment data this week were the new unemployment claims. They surprised the markets with a strong increase and also an upward revision of last week’s claims. The negative data now are becoming a trend, causing economists and investors to reduce their expectations for the next few months.
The University of Michigan Consumer Sentiment Index was down in the latest month and below expectations. That’s simply another of the negative surprises and another indication that the economy is slowing as monetary stimulus fades.
The inflation data were the only other notable data. There weren’t real surprises or negative features of these reports. The Producer Price Index was flat at the headline level but surged at the core (minus food and energy) level. That increase was led by increases in passenger car and light truck prices. The Consumer Price Index decreased at the headline level and increased slightly at the core level. Reversing recent months, energy prices declined in the last month. That caused the drop in core inflation and the modest headline inflation. Over the last year, headline inflation is up 2.6%.
The Markets
As noted above, the markets had a wild week. Let’s start with equities. They rose slightly Monday, declined sharply Tuesday, and surged late Wednesday and Thursday as Fed officials went on their PR offensive. But the China data and other factors led to a fresh retreat late Thursday and on Friday. Emerging market stocks were down almost 2% at their low for the week, up over 1.5% at Thursday’s peak, and close the week about flat for the week. The S&P 500 was down 1.5% on Tuesday but didn’t recover as much as emerging market equities. Its loss for the week is over 0.5%. Small U.S. company stocks lost a little more.
Commodities generally followed stocks for the week, but weren’t as volatile. Broad-based commodity indexes did the worst, closing down over 0.5%. Energy held up better, closing flat for the week. Gold actually had a good week. On Thursday it was up over 2% for the week but lost some value, gaining only a bit over 1% on the week.
Long-term U.S. treasury bonds went the opposite path of stocks all week. After being down as much as 0.5% on Thursday, they end the week up over 1%. The dollar wasn’t as volatile. But it stumbled on Thursday and recovered enough on Friday to close flat for the week. Corporate bonds, high yield bonds, and TIPS all had modest gains for the week.
Some Reading for You
China’s back in the news and not in good ways. On my blog I’ve been following the mysteries about the death of a U.K. businessman and the removal of a Chinese political leader. Read my latest update here. The changes in China’s economy also are important and aren’t looking positive in the near term. Read John Makin’s essay on the topic.
Target date funds are latest rage in retirement investing. I’m doing research on them. In the meantime, I made some summary comments and linked to a good article on them here.
I comment on these items and more on my public at http://www.bobcarlson.net.
April 6, 2012 01:20 p.m.
Your Retirement Finance Week in Review
The economy and markets are providing a lot of fodder for my next free online investment presentation. I’ll be addressing “Today’s Big Test for the Global Economy and Central Banks.” It looks like our timing for this presentation is going to be very good. The webinar is scheduled for Wednesday, May 2, at 3:30 p.m. eastern time. Spaces are limited. To reserve yours, contact TJT Capital at info@tjtcapital.com or 877-282-4609. I discuss my webinars in my role as Managing Member of Carlson Wealth Advisors, LLC and its relationship with TJT Capital.
The markets had a four-day week, but the economic data reports did not. We can see now the extent to which the markets are manipulated by the central banks and depend on easy money to keep them buoyant. It also appears that all the Fed’s efforts haven’t done much to generate sustainable economic growth. At least that’s the current worry. From November through February, the economic data was full of positive surprises. That’s also the time when extreme monetary policies were in place in the U.S. and Europe. The emerging economic also were backing off the tightening policies in place for about two years.
In March and early April, the economic data surprises mostly were negative, as we’ve documented in these reports. Likewise, the stock market indexes have stumbled. Investors feel a need for more monetary stimulation.
But the Fed and the European Central Bank indicated not to expect more stimulation soon. The head of the ECB said this week that he’s becoming worried about inflation. The minutes of the Fed’s latest meeting were released, and these indicated only a couple of voting members favored additional monetary stimulus. U.S. stocks fell sharply soon after the minutes were released.
The issue for investors now is how far stocks have to fall before the Fed decides the economy and markets need another jolt of quantitative easing. In 2010 and 2011, the Fed hasn’t acted until indexes fell at least 15% and appeared to be approaching a free fall. I’m watching both the data and the Fed closely. For now, the upward momentum in both the markets and the stock indexes appears to have stopped.
Europe also entered the picture again as Spain had trouble with a bond auction. Spain wasn’t supposed to be a problem, at least at this point in the crisis, so its emergence as a problem creditor shook up many investors.
The Data
The main data this week was the employment situation report. It was another negative surprise. Economists expected the economy to create over 200,000 jobs. Instead, only 120,000 were created. (The good news is that last month’s job creation was increased from 227,000 to 240,000; but January’s number was revised down.) The unemployment dropped by a tenth of a percentage, but that’s because people dropped out of the work force. The weakest part of the work force was the service sector, especially retail, with manufacturing remaining relatively strong. Average hourly earnings rose modestly and in line with expectations, but the average workweek declined slightly.
The employment condition report was not consistent with the ADP employment report issued earlier in the week. That report showed job gains consistent with the last few months of over 200,000. New unemployment claims issued Thursday also were consistent with the last few months, showing a small decline and continuing a pattern of setting a new low since the recovery began in 2009.
Consistent with the employment report was the ISM Non-Manufacturing Index. This showed a small decline from the previous month and level below expectations.
There continued to be good news from the manufacturing sector. The ISM Manufacturing Index had a strong rise and was above expectations. Yet, it’s still below the levels of late 2010 and early 2011. Factory orders also had a nice gain after a decline last month. New orders for durable goods in the factory orders report had a strong increase.
Housing had only one report this week, but it was a poor one. Construction spending declined sharply and was well below expectations. Construction spending still is almost 6% higher than al year ago. The only positive sector in the report was multifamily housing (apartments).
Summing it up, the data continue to point to a modestly-growing economy that might be reducing its rate of growth from what it was a few months ago. The latest reports are causing a number of economists to reduce their estimates of first quarter GDP growth, because the March data was clearly below January and February data almost across the board.
The Markets
U.S. markets were closed Friday for Good Friday observance. Even with only a four-day week there was a lot of volatility in almost all assets.
Long-term treasury bonds were falling sharply and had a 3% loss by Tuesday’s close. But they recovered the next two days on reports of economic weakness to close with a 1% weekly loss. Gold rose on Monday but declined sharply until by Wednesday it was down about 3% for the week. It recovered a bit to close with a 2% loss.
There was a strong difference between large company U.S. stocks and emerging economy stocks on one hand and small company U.S. stocks on the other. None had a good week, but large U.S. stocks and emerging economy stocks declined only 0.5% after holding 1% and 2% gains respectively on Tuesday. Small company U.S. stocks didn’t do well all week and closed down 2%.
The U.S. dollar was the week’s best asset, returning 1.5%. Commodities surge early in the week with 1.5% gains but closed about even for the week. Oil reversed its recent rise and declined most of the week. Bonds other than long-term treasuries had modest losses for the week.
Some Reading for You
You might be interested in a couple of discussions I had this week on my public blog. I’ve been reading a book, The Holy Grail of Macroeconomics by Richard Koo. It provides interesting perspectives on what the Fed is doing today. You might be interested in that commentary plus a CNBC article that turns out to be something of a companion piece on how the Fed follows the stock market.
Some prominent economists weighed in this week against all the optimists who believe we’re now back in a regular market and economic cycle and can return to old policies and analytical tools. In this post I reviewed and linked to pieces by the authors of the excellent book This Time is Different and also to a piece to Harvard economist Martin Feldstein.
I comment on these items and more on my public at http://www.bobcarlson.net.
