August 2012

August 31, 2012 05:45 p.m.
Your Retirement Finance Week in Review

Ben Bernanke’s given his important Jackson Hole speech, indicating the Fed might take more action at its September meeting. But what, if anything, will Europe do? And what about the fiscal cliff in the U.S.? Will China suffer a hard landing? There’s a lot going on, and the next six months will be important and tumultuous for the markets and your finances. We’re going to bring all this together, and more, in another free investment presentation and webinar on “Facing the Fiscal Cliff and Other Obstacles” on Wednesday, Sept. 5 at 3:30 p.m. eastern time. It’s free, but attendance is limited. To reserve your spot, call 877-282-4609 or e-mail info@tjtcapital.com. I discuss my webinars in my role as Managing Member of Carlson Wealth Advisors, LLC and its relationship with TJT Capital.

The markets are likely to tip one way or the other starting next week. Central bankers have manipulated markets for the summer with words. They’ve made promises or hints that significant stimulus was coming. That was enough for investors to buy enough stocks and other assets to keep prices up. Fed Chairman Ben Bernanke wrapped up the talking with Friday’s speech at Jackson Hole, in which he implied that the Fed needs to act. But he didn’t provide specifics about when and how much.

The time for action is about up. Investors are expecting something from the European Central Bank on Sept. 6 as well as a decision from a German court about whether its role in the bailout funds is constitutional. After that, there’s the Fed’s September meeting and throughout the month a steady stream of bond refinancings or new issues due in Europe, especially for Spain and Italy.

I suspect words won’t be enough this time. Neither will announcements of future plans or other actions that qualify as kicking the can down the road. So far, central banks have done just enough to placate investors and keep the global economy going. This time there’s a big risk investors won’t be satisfied and the markets will respond unfavorably.

That’s why I don’t think it’s wise to guess or assume which way central bankers will move this month. Instead, stay balanced and diversified with sell triggers in place. Respond to events instead of trying to anticipate them.

The Data

It was a fairly light week for the data.

The biggest news probably was the Case-Shiller Home Price Index. The index registered the first year to year increase in prices, only 0.5%, since the housing peak. The consensus view is that the data, combined with generally rising prices for five consecutive months, indicate we’re at a bottom in the housing market. There’s a contrary view. Some analysts point out that the year ago numbers were artificially low because of the effects of the foreclosure document-signing scandal. They view the recent data as similar to the period after the new homebuyer tax credit goosed sales in 2010. I suspect we’re at the bottom, barring a new recession, but it will be a long bumpy bottom. The pending home sales index also had a modest rise, adding to bullishness about housing.

The second estimate of the second quarter’s GDP came in as expected with a slight upward revision to 1.7% from the 1.5% first estimate. It’s nice that the data show we’re not in a recession, but growth still is weak and is slower than earlier in the year and last year. It’s also not strong enough to improve the labor picture. That means demand for goods won’t increase much, so businesses won’t be hiring or making new capital investments.

Other positive news during the week was a nice pop in consumer spending, rising 0.3% from last month. But putting that in longer-term perspective, it only offset several months of poor spending numbers. That means spending growth still is modest and not enough to cause businesses to expand. Part of the spending increase was due to reduced savings. Other good news in the Personal Income and Outlays report is that inflation still is not a worry.

Manufacturing data this week was mixed. The Dallas Fed survey declined, indicating that the economy in that region is growing but at a slower pace than recently. Importantly, new orders eased, pointing to slower growth next month. The Richmond Fed added to a month of largely negative reports from Fed regional bank this month. New orders in the Richmond survey were especially weak. The last regional bank survey of the month, Kansas City, was positive. The number was higher than last month and than estimates. Even new orders were positive.

Factory orders also increased for the month after a decline last month. New orders and shipments in this report have been in a fairly steady decline for about a year. The Chicago Purchasing Managers Index also was generally positive. The headline number was flat. But the new orders component was strong. Overall, it appears that manufacturing nationally still is growing but not at the strong rate of 2009-2011 and no longer is driving the economic recovery.

On the negative side, consumer confidence continues to decline by most measures. Confidence as measured by the Conference Board declined sharply, and expectations of future conditions were very weak. Consumer sentiment as measured by the University of Michigan increased modestly, but this has been the outlier of the consumer surveys. As in other surveys, in this survey the expectations component was weak. The Bloomberg Consumer Comfort Index also is mired at a low level.

Consumer surveys generally are good indicators of demand and sales over the next few months. So, the generally negative numbers in these surveys is important to evaluating the economic outlook.

New unemployment claims were unchanged from last week at 374,000. That increases the four week moving average and continues to indicate that there isn’t much improvement in the labor market.

Another negative development is that corporate profits, as measured by the Bureau of Economic Analysis, decreased 5.3% in the second quarter. Corporate profits still are near their historic highs, but the rate of growth has slowed markedly from early in the economic recovery.

The Markets

It was generally a quiet week in the markets as investors waited for developments from central banks and policymakers. All the action was packed into Thursday and Friday.

The biggest movers were commodities. Energy-based commodities rose 1.75%, and broader-based commodities rose 1%. Gold declined most of the week but had a strong rebound in response to Ben Bernanke’s speech, rising almost 1.5% for the week.

Interestingly, long-term treasury bonds also had a strong week, rising 1.75%. Most of the increase was a strong opening on Thursday and a strong close on Friday. High-yield bonds rose 0.25%, and investment-grade bonds rose almost 0.75%. The dollar fell after Bernanke’s speech, losing 0.5% for the week.

Stocks didn’t do as well, giving up a lot of ground on Thursday. The best performer was the U.S. small company stock index, which finished the week up 0.5%. The S&P 500 and Dow lost about 0.25%. Global stocks, as measured by the All-Country World Index, lost a little over 0.5%. Emerging market stocks were down all week, primarily due to bad economic reports from China. They closed the week down over 1%. The Shanghai Composite Index is at its lowest level since the crisis of 2009.

Some Reading for You

What’s happening in China? There’s a debate whether China’s having a soft landing or a hard landing. I’ve linked to different views on this on the blog the last couple of weeks. If you’re interested in the debate, go to my blog and scroll through to read the China items.

Does your 401(k) plan have some fundamentals flaws? Take a look at this article.

Another continuing debate is whether housing has started a recovery mode. You can find that view in a lot of places. Here’s a more bearish view.

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

August 24, 2012 04:15 p.m.
Your Retirement Finance Week in Review

A lot is going to happen in the next few weeks, and it’s going to happen rapidly. Investors react each day to how they think those events are going to unfold. We start with the Federal Reserve’s annual conference at Jackson Hole at the end of August. That’s followed by the Sept. 6 meeting of European Central Bank. The Federal Reserve will meet later in the month. Throughout September and the following months a number of debt issues of European countries need to rolled over or refinanced.

Until recently, investors were anticipating that in Jackson Hole Ben Bernanke would hint at or broadly outline a new phase of monetary stimulus from the Fed. Then, they expected the ECB to announce after its Sept. 6 meeting that it will buy bonds of debtor countries in large numbers. A number of different monetary easing programs have been floated, but they all involve the ECB buying bonds of Italy, Spain, and other countries and eventually taking the losses. This would enable the countries to refinance their debts the next few months. Finally, the expectation was that the Fed would announce a new quantitative easing program at its meeting.

Recent events shook some confidence in that scenario. In Europe, leaders still are negotiating. Germany will permit an expanded monetary program only if there’s central control over banking and fiscal policies of the debtor countries. Some days it seems that might happen; others it doesn’t. In the U.S., the economy is slowing, but it’s still growing and the most recent data is more positive than negative. The release of the minutes of the last Fed meeting at first seemed to promise substantive new easing, but closer reading convinced many analysts the initial reaction was wrong.

We’ve had a fairly volatile two weeks in the markets, with most markets ending essentially where they started. It’s no secret that the European crisis has been driving most of the action in global investment markets the last couple of years and also the strength of the global economy. You can make a bet that in the next few weeks all the key issues will be resolved, and markets will rally. But there’s a lot of risk in that bet. Our approach at Retirement Watch is to be balanced and have sell signals in place. As markets move in one direction we’ll automatically sell those assets that suffer and profit from the others.

The Data

Global economic data reported this week was mostly poor. Europe in general reported better number than expected, but a number of countries are in recession and Germany barely avoided negative growth while its growth slowed rapidly. Conditions continue to deteriorate across Europe. There was evidence of slower growth in China, according to the flash Purchasing Managers Index These numbers generally caused markets to decline on Thursday.

We focus on residential housing, which was the subject of several reports this week. We’ve been saying for a while that housing is bumping along the bottom, and it appears that in many areas the bottom might be behind us. That could change if there’s a recession, but for now it looks like the bottom is behind us. But don’t expect a strong recovery. Housing is bottoming at a very low level, and it’s growth rate by any measure is very modest.

This week, for instance, existing home sales had a nice rise after declining the previous  month, but the median price declined 0.8%. Over the last year, however, home prices rose almost 10%. New homes sales rose more than expected, and are rising faster than existing home sales. Homebuilders are becoming more and more optimistic about their markets. The Federal Housing Finance Agency also reported that the price of the average single family home rose again.

Manufacturing data continued to indicate growth, but at a slower rate. The durable goods orders was very positive, but after separating the volatile aircraft orders, the number was negative, and last month’s poor number was revised down. The Chicago Fed Activity Index also indicated growth, but slow growth.

New unemployment claims unexpected rose to 372,000. This still is within the range new claims have been in for a while, and the four-week average rose only a small amount. The data continues to indicate that the employment market is stable at the current high levels of unemployment and low wage growth.

The Markets

First, let’s take a step back and look at something longer-term than the weekly numbers. Since the June 1 global market lows, the S&P 500 is up 11.1% but Shanghai stock prices are down 10.8%. That’s interesting because Chinese growth drove the global economy from the crisis lows of 2008, and China’s stock market was a global leader until late into 2011. It means investors generally are more optimistic about the U.S. and Europe than they were in May and less optimistic about China.

Long-term treasury bonds still are down almost 6% for the last month, but they made up a lot of ground this week, rising about 2.5%. The dollar lost about 1.5% for the week, falling steadily almost all week. Investment-grade corporate bonds gained 1%, and high-yield bonds rose about 0.75%.

In stocks, the Dow had the worst week, losing about 1%. Small company U.S. stocks did slightly better. The S&P 500 and emerging market stocks both lost about 0.25%. The All-Country World Index broke even. The equities all had a good Monday, steady declines Tuesday through Thursday, and a recovery on Friday.

Gold finally had a good week, rising about 3.5% and becoming the best-performing asset for the week. Other commodities did well through Wednesday but declined steadily the last two days of the week. Energy-related commodities rose about 0.5% for the week, and broader-based commodities gained about 1.75%.

Some Reading for You

Expect higher premiums for Medicare. It doesn’t matter who wins the election or how Medicare is reformed (or not). The math says higher premiums are coming.

It’s just starting to hit headlines, but you need to pay attention to it. Higher food prices, caused primarily by the drought in the U.S., will affect inflation and consumer spending. That will affect business spending on new hires and capital investments. Pay attention.

The decisions of the ECB on Sept. 6 will determine a lot of what happens the rest of the year and beyond. For a review of what they’re likely considering, check here.

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

August 17, 2012 04:15 p.m.
Your Retirement Finance Week in Review

The economic data worries more and more analysts, though for different reasons. Those hoping for a big splash of stimulus from the Federal Reserve worry when there’s now too much positive data. The economy seemed to be rolling over and nearing a recession through the end of July, but a lot of the recent data was better than expected. Now, there are fewer reasons for the Fed to take action in the next few months.

Other analysts worry that, while the economy maintains positive growth, it is very slow growth. It won’t take much to push the U.S. economy into a recession. Europe already is there. China seems to have stabilized its economy but it won’t be generating the high growth rates of the last 10 years any time soon.

The only conclusion I can draw at this point is that economic growth is slow, but it’s still positive. We aren’t going to have much of a boost in household income, so there won’t be any reason for businesses to expect higher demand and increase their spending on capital and labor. I would be more optimistic about adding risk to the portfolios, but the potential for serious problems from Europe is too great. There are a lot of important dates coming up in Europe, and there doesn’t seem to be a plan to deal with them yet. Add the way the U.S. is approaching the fiscal cliff, and I conclude that this is a good time to stay balanced, diversified, and nimble.

The Data

There was a lot of better-than-expected data this week, but it didn’t do much to move markets.

The week’s big data release was retail sales, and it was much better than expected. The report needs to be put into context. The last few months’ reports were very poor, showing declining sales, and the June report was revised downward. So, the July boost was from a low level. But the July report was strong in all categories and strong enough to give the last few months average growth.

There have been some reports that the retail sales report is inconsistent with other data. In particular, California reported a big drop in sales tax data. Given California’s size, it is hard for national retail sales to do well when California is doing poorly. So, some analysts expect the July number to be revised downward next month.

Inflation’s been a fear of many people because of all the monetary stimulus. But it takes more than that to push inflation higher in a deleveraging. This month’s Consumer Price Index confirmed that inflation is about where the Fed wants it around 2% and around the long-term average. There are different forces pushing and pulling the inflation data. Rising rents and drought-induced commodity prices push it higher. The potential for conflict in the Middle East pushes energy prices higher. The weak labor market, slowing economic growth, and household deleveraging and high debt levels put downward pressure on prices. On the whole, inflation is moderate but at this point is more likely to decline than rise.

Industrial production also was sharply higher for the month, but the previous month was revised down. The IP number for August is out of line with most other recent data on manufacturing, so we have to wait and see if this is the beginning of a new trend or an anomaly. For example, the Empire State Manufacturing Survey was negative and below expectations, and it also means all the regional Fed bank surveys now show negative growth in manufacturing. The Philadelphia Fed Manufacturing Survey also was negative and below expectations.

The National Association of Home Builders Survey also was positive. It showed increases in traffic in new homes and current sales. The index still is very low compared with the boom period, but it has increased for four months. But in another report housing starts were below expectations and below last month. But it is up 21.5% from a year ago. But new permits rose a bit, indicating higher housing starts in the future.

The Leading Economic Indicators rose above expectations and enough to reverse all of last month’s decline. There were few negatives in the report: declines in the ISM manufacturing report and declining consumer expectations.

But the latest University of Michigan Consumer Sentiment Index rose and was above expectations. But the survey’s been weak the last few months and is still near its low point for the year.

A major negative for the week was the National Federal of Independent Business Optimism Index. It declined after a couple months of improvements. Small business owners were especially negative about future plans for hiring and capital investment. They also identified consumer spending as being especially weak.

Jobless claims declined a small amount. Basically claims are in the same range they’ve been in for a while. That range indicates there won’t be substantial changes in unemployment, which means there won’t be much of an increase in household income and, following from that, in spending.

The Markets

It was another bad weak for long-term treasury bonds. Ever since Bill Gross of PIMCO issued his negative view of equities and increased his treasury holdings, they’ve ben declining. They declined over 3% for the week, recovering a little from a 4% loss late Thursday.

High-yield bonds bounced within a narrow range and gained 0.25%. Investment-grade bonds didn’t do as well, losing 1% for the week. The dollar was fairly stable and closed with essentially no change.

Things weren’t as volatile in stocks. Emerging market equities had the worst week, but they declined only 0.5%. They were down most of the week. The Dow was next with a 0.5%. The S&P 500 and the All-Country World Index each gained just under 1%. U.S. small company stocks started out poorly but closed the week with a gain of about 2%.

Commodities, other than gold, had a good week. Gold was down all week and recovered a bit on Friday for a 0.5% loss. Energy-related commodities rose the second half of the week to close with a 1.5% gain. Broader-based commodities continued their rally, gaining 0.5% for the week. Several factors are pushing commodities above their recent lows. The most important might be that China’s pushed enough stimulus into its economy to stabilize growth at what for it is a low level. Also, the drought in the U.S. and unease about the Middle East are factors.

Some Reading for You

The Washington Post had a good interview with baseball Hall of Famer Cal Ripken, Jr., whose turning 52 this month. Ripken discussed aging and longevity.

Most investors engage in too much data mining. They’re looking for one or two pieces of data that will tell them how to invest. I’ve been a critic of this approach and identified two new examples of it this week here and here.

Most of Wall Street’s been attacking Bill Gross of PIMCO since he wrote a skeptical essay about the returns from stocks for the next few years. You might want to read this post about it.

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

August 10, 2012 07:50 p.m.
Your Retirement Finance Week in Review

We’re working toward the endgame in Europe with a series of surprising, even stunning, actions. The economic data in the U.S. surprises forecasters almost every day. Lurking in the background is the uncertainty about what U.S. policymakers will do about the fiscal cliff and other issues. A lot will happen this fall. We’ll bring all this together and lay out a plan of action in another free investment presentation and webinar on “Facing the Fiscal Cliff and Other Obstacles” on Wednesday, Sept. 5 at 3:30 p.m. eastern time. It’s free, but attendance is limited. To reserve your spot, call 877-282-4609 or e-mail info@tjtcapital.com. I discuss my webinars in my role as Managing Member of Carlson Wealth Advisors, LLC and its relationship with TJT Capital.

Stocks recently reached a three-month high, spurring a lot of optimistic headlines in the financial media. This is a slow time of year, so it’s a good time to look at the longer-term picture. The S&P 500’s been in a trading range in 2012. The currently rally is the second attempt to break through the high of late April/early May. While there’s been a lot of noise and volatility, most investors don’t have much to show for their efforts. Looking at the five-year picture, stocks still be below their highs of 2007. They’re well above the low of 2009, but the rate of increase has slowed considerably. The big rise ended in early 2010, and the advances since then have been modest and with a lot of volatility.

The currently rally is at risk of rolling over if the U.S. and global economies continue slowing down. The markets since 2008 can’t be examined in isolation. The ups and downs of the markets, stocks especially, are linked tightly with the beginning and ending of monetary stimulus. Even fiscal stimulus hasn’t been much of a factor for stocks. Monetary stimulus is what’s moved stocks, and the expectation of more stimulus is what’s holding stock prices up. Central bankers are hesitant to pull the trigger. They want to pressure fiscal policymakers to act, and they know that the power of monetary stimulus diminishes with each effort.

The Data

This was a very light week for economic and financial data. Most of the news that moved markets didn’t come from the data.

The premier report for the week was the update on Consumer Credit. It was largely a continuation of recent months. American households remain over indebted, and the reductions in debt levels largely are a result of defaults rather than paying down debt. In June, credit card debt declined a bit while there was modest growth in non-revolving credit, which are primarily auto loans and student loans. There still is very modest growth in mortgage debt. Historically, mortgage debt drives consumer spending and the demand side of the economy. With stagnant housing prices, slowly-growing household incomes, and volatile stock prices, households don’t have a lot of ability or interest in borrowing.

The productivity report was positive. Productivity increased to 1.6% and was above expectations. The previous quarter productivity declined. Productivity is key to maintaining corporate profit margins, so the boost is considered good for future earnings prospects. But it might not be good news for economic growth. Part of the increase in productivity was due to small increase in hours worked. If this keeps up, companies won’t need to hire more workers. The increase in unit labor costs also was lower than in the previous quarter.

The bottom line from the productivity report is that we have a slowly growing economy with a weak labor market. There’s not much in this report to expect household demand to increase or businesses to hire more.

New unemployment claims fell and were below expectations, a positive surprise. They’re still fairly high at 361,000 and are within the range of recent reports. So we have to conclude that we still have a weak labor market that’s not changing much.

The Markets

Without much economic data, the markets reacted this week to central banker statements and rumors. The main market mover was a statement by a Fed official published on Tuesday in which he recommended open-ended bond buying by the Fed to low unemployment. This would be a quantitative easing program to surpass all this to date.

Treasuries moved sharply down early Tuesday after the published statement. That pushed treasury yields hit their highest level in a month. Treasuries sank a bit more as the week went on and ended down almost 2%. Treasuries were the week’s big loser.

The winners for the week were commodities. Energy-related commodities were the week’s winner, gaining almost 2% after being up 2.25% at their peak. This surge I think was partly due to expectations of more monetary easing and partly from political problems in the Middle East. Broader-based commodities rose less, about 1.5% for the week. This also had dual cases. The expectation of more monetary stimulus was one. The wide-spread drought in the U.S. was another.

Gold didn’t do as well. In fact, it didn’t do much at all, finishing the week with a gain of about 0.25%.

The dollar also didn’t do much for the week. It bounced up and down around no gain and finished the week with a tiny gain.

The rest of the investment world traded in a tight range all week. Equities generally rose about 1% or less on publication of the Fed official’s remarks but traded up and down the rest of the week. Emerging market equities had a wild week and rose the most, closing up over 1.25%. Small company U.S. stocks were close behind had the best week, rising more than 1%, after being up 1.5% on Tuesday. The All-Country World Index was close behind, rising 1%, after being up over 1% on Tuesday. The S&P 500 gains a little over 0.50%, and the Dow lagged, gaining just over 0.25%.

High-yield bonds and investment-grade bonds had modest losses around 0.50%. Curiously, investment-grade bonds did a little worse than high-yield bonds.

Some Reading for You

There’s been a good discussion the last few weeks about the long-term returns of stocks. Here’s