April 2014

April 25, 2014 04:10 p.m.
Your Retirement Finance Week in Review

There were two major data releases this week. One was Caterpillar’s earnings report and accompanying commentary. The other was related to housing. We’ll discuss housing in the data section below.

Caterpillar’s report was a good news/bad news event. The good news was several fold. The company increased its estimated profit for the year. It attributed this increase to higher demand for construction equipment. In fact, it doubled its estimated 2014 sales growth for construction equipment, saying they will increase 10%. It attributes this increase to higher demand in North America, noting a “kick” in commercial construction to supplement already-improving demand for residential construction. The Caterpillar CEO said he’s hearing a lot of optimism from U.S. customers. That said, activity still is well below the 2006 peak.

The bad news is from outside the U.S. The company business outside the U.S. and its commodity- and mining-related businesses are slumping. That’s a result of the slower growth we’ve seen in China and other emerging economies as well as the continuing troubles in Europe.

The issue for investors and businesses is how much the troubles outside the U.S. will hurt the U.S. economy. Clearly, it will reduce exports for the U.S. and earnings for the large, global companies that make the bulk of their sales outside the U.S. GDP in the U.S. in 2014 will be reduced because of the problems outside the U.S.

Currently it appears that U.S. growth is strong enough to maintain growth of around 2%. But it’s not a sure thing. Slower growth in housing and less stock price appreciation also will reduce growth a bit from 2013’s peak levels. These risks are why I think it’s unlikely interest rates will rise as much as markets indicate and many people fear.  While the Fed will reduce its asset buying, I don’t see it raising interest rates in this environment.

The Data

Several housing reports were issued this week. The latest and the one that seemed to affect stock indexes was Thursday’s mortgage lending report. Higher interest rates are having an effect. Mortgage lending for the first quarter was at its lowest level in 14 years. Lending was down 58% from a year ago and 23% from the fourth quarter. Mortgages for home purchases were at about the same level as a year ago, but home equity loans declined dramatically.

Several other housing reports for the week were consistent with mortgage lending. Existing home sales declined for the seventh time in eight months and are down 7.5% over 12 months. New homes sales also declined 14% for the month.

The only good news for the week was part of the cause of the sales decline. The FHFA reported that home prices increased more than expectations for the month and are up almost 7% over 12 months.

Higher mortgages rates and home prices mean home prices are less affordable. People no longer are rushing to buy homes before the next price increase. They’re willing to wait for either prices or rates to settle down before buying. Also, the price increases mean that the investors who supported the market over the last few years with all-cash purchases are less attracted to buying homes to rent or renovate. A final reason sales are down is that distressed and foreclosure sales are well below the levels of a few years ago. That’s a good sign and indicates we’re returning to a normal real estate market.

The data continue to indicate that housing is slowing down from its strong pace of the last couple of years. That’s to be expected. But it isn’t falling apart. So, while residential housing won’t contribute as much to growth as in 2013, it isn’t likely to b ea drag the way it was back in 2008 and 2009.

Manufacturing had relatively good news for the week. Much of this likely is still a rebound from the weather-related slowdown of earlier in the year. But a weather rebound doesn’t explain all the growth. There’s clearly some sustainable growth in manufacturing.

The Richmond Fed reported a strong rebound above expectations in its manufacturing index, with good growth in new orders. The PMI Manufacturing flash index reported steady growth at mid-month. Durable Goods also surged ahead of estimates and last month. Even after excluding the volatile transportation sector, there was a strong increase. The Kansas City Fed Manufacturing Index was a little below last month but still indicating moderate growth.

The Leading Economic Indicators from the Conference Board continued to have strong growth, accelerating from recent months. Consumer Sentiment as measured by the University of Michigan also increased sharply to the second highest level of the economic recovery. This usually is a sign of higher retail sales in a few months.

The Markets

Stock indexes were doing all right until Friday. Some poor earnings reports and the mortgage lending report sent stocks lower. The S&P 500 did best, losing about 0.4%. The Dow 30 and All-Country World Index lost about 0.5%. The Russell 2000 Index of U.S. Smaller Company Stocks lost 1.5%, and emerging market equities lost almost 2.5%.

The dollar was down most of the week, closing down 0.2%.

Long-term treasury bonds gained about 1%. Investment-grade corporate bonds and Treasury Inflation-Protected Securities (TIPS) each gained about 0.3%. High-yield bonds about broke even.

Commodities had a mixed week. Energy-related commodities declined almost 0.6%. But broad-based commodities gained 0.6%. Gold had a good week, gaining 1%.

Some Reading for You

Mohammed El-Erian former CEO of PIMCO finally gave an interview about his departure.

Here’s a good review of the latest housing data.

Here are some kind words about variable annuities.

I comment and link to these and other items on my public blog at http://www.bobcarlson.net.

April 18, 2014 11:30 a.m.
Your Retirement Finance Week in Review

Next week will be my next free online presentation as part of the eMoneyShow. It’s scheduled for April 24 at 12:40 p.m. eastern time. This is part of the “Stocks, Options, and ETFs eMoneyShow.” It includes a range of financial experts and advisors and runs from April 22-24. It’s free, and you don’t have to travel. Enjoy the presentations from the comfort of your home or office. To register and for more details, click here.

Now, on to this week’s topic.

It was a fairly quiet, holiday-shortened week. The markets were closed and no data was released on Friday, and there wasn’t a lot of important data released all week.

So far this year, markets have been churning. The major stock indexes traded in a fairly narrow band, hitting new record highs a few times only to give up those gains quickly. Volatility has been low compared to historic averages. In fact, volatility is now down to 2007 levels, which could be considered ominous.

Markets are churning largely because prices now reflect what’s happening in the economy and likely to happen over the next year. We’ve gone through the major upheavals. First was the financial crisis and collapse in 2008. Then, there was the recovery largely induced by the Fed’s quantitative easing. Now, we’re basically back to equilibrium, fair valuation, and stability.

Most investors expect the economy will deliver what it seems to be delivering: low growth, low inflation, low defaults, and no crisis. Interest rates are expected to rising steadily. I suspect if there’s a surprise it will be that the economy isn’t strong enough to endure rates to rise as high as the markets expect, so rates will be steady or decline.

Of course, there are numerous potential problems around the globe, and any of them could develop from a potential problem to a real problem and cause markets to decline. Or things could develop better than expected. But I think the potential for a negative surprise is higher than the potential for a positive surprise. All the good news seems to be priced into markets and not much potential bad news is.

There’s no reason to change your portfolio or make a big bet in any direction. It’s a good time to be diversified. Have a bias in favor of rising stocks and bonds. Real estate investment trusts and tax-exempt bonds remain good opportunities. Don’t expect much this year from gold, commodities, and other hard assets.

Of course, monitor the economy and markets for signs that things are evolving differently from what’s expected now. If that happens, major price moves quickly will follow.

The Data

The big data release was retail sales on Monday. They showed a sharp increase over the last couple of months. Investors took a favorable view of that and pushed stocks higher. But don’t get too excited. Bad weather in January and February chilled a lot of retail sales. At least part of this number is people spending money they would have spent the previous months but couldn’t because they were basically trapped in their homes. If this continues a few more months it will indicate the economy is stronger than we thought, but it is too soon to reach that conclusion.

The manufacturing reports issued this week were mixed but overall positive. The Empire State Manufacturing Survey was the weakling of the group. It was only slightly positive and less so than the previous two months. The important new orders component was negative. But the Philadelphia Fed Survey increased sharply above last month (which was very positive) and above expectations. It showed a strong pick up in manufacturing in the mid-Atlantic. Industrial Production also had a nice increase.

The latest Beige Book also was released and was right in line with recent data and expectations. It indicated that economic activity is increasing around the country after stalling because of weather the last few months. One point worth noting is that, while there are pockets of pressure for higher wages in some regions or industries, in general there aren’t pressures on employers to raise wages.

A couple of housing reports confirmed that residential housing is weaker than last year. Housing starts were a little under expectations, but single family home starts were higher than expected. That’s generally a good sign. The Housing Market Index was flat after a record loss the previous month due to the weather. That means the traditional spring buying season is not off to a great start in most places.

New unemployment claims increased slightly after a sharp drop last month. This indicates the labor market continues its slow, steady healing and might be near normal in a year or so.

Consumer prices were a big higher than last month but still comfortably below the Fed’s 2% target.

The Markets

Stocks generally had a positive week despite declines late Monday and on Tuesday. At midday Tuesday, emerging market stocks were down over 2%. But they recovered for a 1% gain for the week, the lowest of the major equity indexes. The S&P 500 had the best week, gaining about 2.75%. The All-Country World Index and Dow 30 each gained around 2%. U.S. Smaller Companies as measured by the Russell 2000 gained 1.5%.

Bonds didn’t do as well. High-yield bonds, following stocks, did best by gaining 0.6%. Investment-grade bonds fared worst, losing 0.2%. Long-term treasury bonds and Treasury Inflation-Protected Securities (TIPS) each about broke even for the week.

The dollar gained almost 0.4%.

Gold had a rough week, due entirely to a sharp drop on Tuesday’s open. This likely was due to news reports that demand for gold in China is dropping. Consumer use of gold in China and India are believed to be major drivers of demand and supports for the price. Energy-based commodities had a good week, gaining 1.6% on steady gains all week. Broader-based commodities also did well, gaining almost 1%.

Some Reading for You

The tax return deadline was this week, so I had my annual collection of articles explaining why the failure of the IRS to build its own web-based return filing system costs taxpayers billions in fraudulent refunds, identity theft, and software purchases. Here’s another one.

An estate plan is about a lot more than taxes, as the example of Mickey Rooney shows.

Mohammed El-Erian finally gave a brief interview about why he left PIMCO.

I comment and link to these and other items on my public blog at http://www.bobcarlson.net.

April 11, 2014 04:20 p.m.
Your Retirement Finance Week in Review

The markets moved a lot this week, but it wasn’t because of the economic data. Earlier this month the S&P 500 hit a record high, but it now is almost 4% lower.

The end of the third quarter and the prospect of what the coming earnings reports will look like is the likely trigger for the recent decline. It started with last year’s hottest stocks, those that were propelled higher primarily by momentum. Early in the quarter analysts projected S&P 500 earnings would grow 6.6%, but now they’re anticipating a 0.9% decline in earnings. Investors are adjusting their portfolios based on this new outlook. Biotechnology stocks and other technology stocks are leading the decline.

The release of the minutes of the last Fed meeting also might have influenced investors. There wasn’t much new in the minutes. They indicated that the Fed is likely to continue reducing asset purchases unless there is an extraordinary change in economic data. Some investors were spooked by a discussion of how the Fed should communicate future increases in interest rates. Though that isn’t likely to occur for a while, the talk concerned some investors. The economic forecasts of Fed members seem too optimistic to me, and I think the Fed will have to adjust policy in the future when the data come in worse than expected.

The stall in the markets so far this year is healthy after the surge of 2013 and the longer surge since 2008. Value stocks still are doing better than growth stocks, but value stocks still are declining. The decline could become something worse, but for now it looks like a normal correction in a bull market. If it becomes something worse, we’ll pare the stock allocation in our portfolios and wait for signs of a bottom.

The Data

Consumer credit rose sharply in February, but the growth again was concentrated in auto and student loans. The absence of growth in mortgages and credit cards indicates retail spending growth will continue to be modest and in line with income growth.

Small businesses owners are feeling better following the decline in February’s NFIB Small Business Optimism Index. The index almost recovered all of February’s decline. But hiring plans were one of the few components that was negative. But there was more strength in employers’ plans to increase wages.

Likewise, the JOLTS (Job Openings and Labor Turnover Survey) showed the labor market is steadily, slowly improving. It’s likely that the labor market data will be normal in about a year if recent trends continue. That’s a long climb from the lows of 2008. As the labor market gets closer to normal balance, there finally will be pressure on employers to raise wages, and it might occur before then. The Fed is hoping that it will have ended most of its extraordinary measures by then and that the economy will be able to sustain itself then.

But things might be picking up. New unemployment claims had their largest one-month decline in more than 10 years. This could be an anomaly, but the four-week average also is down sharply

Consumer sentiment as measured by the University of Michigan took a big jump as the winter weather receded. This exceeded expectations a bit and took the index back to the levels of last July. It’s still below the highs for the recovery reached last spring.

The Markets

It was a dreadful week for stocks, but diversified investors saw some bright spots.

Emerging market stocks didn’t do too badly, losing only 1.25% for the week. But small company U.S. stocks as measured by the Russell 2000 fared the worst, losing 3% for the week. Small company stocks led the rally last year, so it’s too be expected that they are leading the decline.

The All-Country World Index lost about 1.8%. While the Dow 30 and S&P 500 both lost around 2%.

High-yield bonds followed stocks lower, losing 0.4%. Other bonds had positive returns. The week’s leader was long-term treasury bonds, gaining almost 2%. Investment-grade bonds and Treasury Inflation-Protected Securities (TIPS) each gained about 0.8%.

The dollar lost ground, dropping almost 1%. Gold had a good week, gaining almost 1.6%. Energy-based commodities also did well, gaining 1.2%. Broader-based commodities gained 1%.

Some Reading for You

Bill Gross of PIMCO was back in the news, giving extensive access to Bloomberg.

Here’s an interesting example of the importance of saving and investing early, which might benefit your grandkids.

Charles Keating of the 1980s savings and loan crisis passed away. Read this perspective on him.

I comment and link to these and other items on my public blog at http://www.bobcarlson.net.

Your Retirement Finance Week in Review
April 4, 2014 04:45 p.m.

The market-moving news this week was mostly from outside the U.S.

Many investors were heartened by news that China was implementing a new package of stimulus measures. For the last couple of years China mainly focused on reducing growth and deflating bubbles, especially a debt bubble. Growth in China indeed is down, and that is hurting other emerging economies that depend on exports to China. But this week China announced that growth was in danger of declining below the government’s target of 7.5%, so new stimulus would be introduced. The stimulus includes railway spending and tax relief. Even so, the government won’t end its efforts to reduce the unsustainable levels of debt in some sectors of the economy.

Mario Draghi of the European Central Bank also made news. The ECB didn’t make substantive changes this week, but in his media conference Draghi indicated he was concerned about the potential for deflation and that the ECB is considering all possible measures, including a quantitative easing similar to that executed in the U.S. Though no action along those lines was taken and there are many practical difficulties in the ECB’s executing such a policy, investors viewed the action as positive.

There wasn’t much taking place in the U.S. The data issued during the week was mixed. It generally shows that the economy slowed during the first quarter and that only part of that slowing was due to the weather. Stocks had a volatile first quarter but basically had no net change. When the effects of the winter weather recede into the past, it probably will turn out that the economy is growing 2% to 2.5% and is likely to stabilize in this range for a while.

The Data

Several employment reports were issued this week, but there wasn’t much news in them. Friday’s Employment Situation reports were a mixed bag. Last month’s disappointing number was revised upward, but this month’s number of new jobs created was a little below expectations. The average workweek increased a little more than expectations, but average hourly earnings didn’t change.

With increases in stock and home prices slowing or nonexistent, households are less likely to reduce savings to pay for spending the way they did in 2013. Businesses aren’t going to invest in capital equipment or new employees if demand doesn’t increase.

The other employment reports for the week were consistent. New unemployment claims rose but were in the same range as recent months. The ADP Employment Report also revised last month’s number of jobs created higher but this month’s number was a little under expectations.

The conclusion from the data is that the labor market remains no its slow, steady path of improvement.

The manufacturing data for the week was mixed. The Dallas Fed Manufacturing Survey was strongly positive for the eleventh consecutive month. Texas manufacturing is more focused on the energy sector than in other parts of the country, so the Dallas Fed survey might not be a good indicators of conditions elsewhere.

The Chicago Purchasing Managers Index showed growth but at a slower rate than last month, the lowest reading since August. The PMI Manufacturing Index was similar. It showed solid growth but at a slower rate than last month. The ISM Manufacturing Index told a slightly different story. It reflected solid growth but was slightly better than last month and slightly below expectations.

Factory orders had a very good headline number, showing a big rebound from a weak February. Even after excluding a big job in volatile transportation orders, the number showed good growth. But hidden in that was a drop in nondefense capital goods orders, which generally is business investment.

In the rest of the economy, nonmanufacturing activities showed strong rebounds from the weather-related declines of February. The ISM Non-Manufacturing Index showed growth across the board, but it isn’t strong growth. The Index still is below the average of the last couple of years. Likewise, the PMI Service Index showed a good increase over last month. But the details didn’t indicate strong growth across the economy.

The Markets

The big news in the stock markets isn’t the movements in the indexes, it is the movement within the indexes. Growth stocks were the leaders much of the last year. But these generally have high valuations, and investors are starting to notice. A lot of the big winners of the last year are losing ground while value stocks are finding buyers.

For example, over the last year the S&P 500 Growth and S&P 500 Value iShares ETFs have close to the same returns. Over the last year Growth is up 32.48% while Value is up 31.69%. But in the last month Value is up about 1% while Growth is down almost 3%. That divergence began March 20 but accelerated this week.

The Russell 2000 Index of smaller U.S. companies had a wild week. At midweek it was up almost 3%. But it had a poor Thursday and Friday, closing with about a 0.6% loss. The leading stock index for the week was emerging markets, but they eked out a marginal gain. The S&P 500, Dow 30, and All-Country World Index were clustered with losses of less than 0.5%.

Bonds had a volatile week. Long-term treasuries were down 1.4% at midweek but closed with only a 0.4% loss. High-yield bonds lost 0.2%. Investment-grade bonds and Treasury Inflation-Protected Securities (TIPS) managed marginal gains.

The dollar had a good week all week, gaining just over 0.4%.

Commodities generally had a wild week. Gold was down 1% early in the week but surged after Friday’s employment reports, closing with a gain of about 0.8%. Energy-based commodities had a bad week but recovered enough to close with only a 0.6% loss. Broader-based commodities closed with a 0.3% gain.

Some Reading for You

Public perception and the stories people tell often are different from what the data reveal. Here’s a good example.

Here’s another explanation of why you shouldn’t be alarmed about the widely-distributed chart showing record profit margins.

Here’s the story behind the great lime shortage.

I comment and link to these and other items on my public blog at http://www.bobcarlson.net.