December 2011
December 23, 2011 01:30 p.m.
Your Retirement Finance Week in Review
I wish all of you a good holiday and happy New Year. Unless something significant happens in the next week, I’ll be taking a break next week and will send the next e-mail after the first week of January.
Thanks to all of you who participated in our free investment webinar on Nov. 30. These regular presentations are growing in popularity, and the feedback is that they’re useful to you. We’ll have another webinar on Feb. 1, 2012 at 3:30 p.m. eastern time. Spaces are limited. To reserve your place in this free webinar, contacting TJT Capital at info@tjtcapital.com or 877-282-4609. I’ll let you know the details when they’re developed. In the meantime, you can review past webinars at www.tjtcapital.com. I discuss my webinars in my role as Managing Member of Carlson Wealth Advisors, LLC and its relationship with TJT Capital.
It’s fitting for the season that this week brought news and economic data for everyone. Taken together it was a mixed collection of information, supporting both bullish and bearish forecasts. As usual a lot of news came from Europe, but it wasn’t all bad this time. Let’s dive into it.
The Data
The big news, based on market reactions, concerned Europe and the U.S. housing market. The European news on Tuesday was a successful auction of Spanish bonds that resulted in a big drop in interest rates. Also, German business confidence surged, according to a report, which was a major change from recent data indicating the German economy is slowing significantly.
U.S. housing markets also contributed to Tuesday’s market surge, because they were significantly higher than in recent months and than forecasts. Poking into the data, however, doesn’t reveal a lot of optimism for the housing market. The jump was largely due to starts in multifamily homes (apartments). On the single family home front, the data continue to indicate we’re scraping along the bottom in most areas. The National Association of Realtors restated their data back to 2007 after finding that there was some double counting of sales. The housing market has been about 14% worse than NAR portrayed it since 2007. The good news in the NAR data is that the latest month showed a 4% increase in existing home sales. Prices also were up about 2%, and the inventory of existing homes for sale declined. The Home Builders Index released on Monday also showed positive growth. New home sales reported on Friday also showed positive numbers for sales and a reduction in the supply on the market. The bad news in that report was sales were helped by lower prices.
The housing market still is far from robust and no recovery is imminent, but it’s possible that housing prices and sales aren’t falling any more.
Thursday’s data were a mixed bad. On the positive side was another sharp and unexpected drop in new unemployment claims. Clearly layoffs are declining and getting closer to a normal level, but we still wait for signs that businesses are hiring and increasing wages. Corporate profits, as computed by the BEA, increased 6.2% year to year for the third quarter, but this was revised down from the previous estimate.
Consumer sentiment as measured by the Reuters/University of Michigan Index rose sharply for the fourth month in a row. The improvement was based largely on future sentiments. I guess all the retail buying people have been doing recently makes them feel good. The Conference Board’s index of leading indicators also was solidly positive. I have doubts about whether the factors used in this index really are leading indicators. But the data used in the index are likely to result in a positive report again next month.
There was some less-than-positive data during the week. New durable goods orders were higher, but the growth was modest and focused in volatile airplane manufacturing. Overall durable orders grew modestly and at a slower rate than for much of the recent cycle. GDP for the third quarter was revised down again. The initial report was of 2.5% growth, and now it is assessed at 1.8%.
Personal income and spending both were modestly 0.1% higher in November. This is the first month in a while that didn’t indicate consumers were dipping into savings to increase their spending. It shows, once again, that household incomes are close to stagnant. On the positive side, one reason spending wasn’t higher was a decline in prices.
Overall, we see an economy that’s been growing at an average or so rate, but much of that growth has come from consumer spending financed by lower savings. As I’ve said before, I don’t know how that can continue. Wages, hours worked, the number of people employed, and household incomes are stagnant. Home prices aren’t rising. Stock prices are volatile but basically flat for the year. There’s some private sector credit growth, but not enough to finance spending increases at recent rates. Add in the effects of slower growth from Europe and China, and I’m cautious about economic growth as we enter 2012.
The Markets
Most of the week’s market action was compacted into Tuesday and Wednesday and reflected a reversal of the previous week or two.
It was definitely a “risk on” week with investors flocking to assets that benefit from economic growth. Diversified commodities were the week’s biggest gainers, clocking in returns around 4% with oil leading the way. Lagging was gold, which was flat for the week after a decline on Monday and rise on Tuesday.
U.S. stocks did almost as well as emerging market stocks with gains around 3.5%. Usually emerging market stocks will lead a rally. But negative news from China continued this week, and that held back Asian stocks a bit. High yield bonds also had a good week, gaining about 2%.
The dollar, TIPS, and investment grade corporate bonds all were essentially flat for the week.
The big loser was the winner of previous weeks: long-term treasury bonds. The iShares Barclays 20+ Year Treasury Bond ETF (TLT) lost almost 4% for the week. That brings it back to where it started two weeks ago with a lot of activity for no gain. Investors clearly had less concern about Europe this week and didn’t feel a need for safety. They sold some treasuries to buy risky assets such as stocks and commodities.
Some Reading for You
It was a light week for reading. I can recommend an interview with Van Hoisington of Hoisington Capital management in Barron’s. (Subscription might be required.) He makes the case for continuing economic weakness and for holding long-term treasury bonds.
I comment on these items and more on my public at http://www.bobcarlson.net.
December 16, 2011 04:15 p.m.
Your Retirement Finance Week in Review
Developments outside the U.S. continued to dominate market discussion and behavior. European news, of course, continued to concern most investors and analysts. But China worked its way into the mix during the week, and it caused new market shudders. The economic data from the U.S. actually was largely positive for the week, but it didn’t matter. In fact, I suspect that if the U.S. data weren’t so positive there would have been a serious meltdown in the markets. As I’ve said before, it will be difficult for the main prop of the recent U.S. data, household spending, to continue positive growth when household incomes aren’t rising and credit growth is modest.
On Dec. 9, investors seemed excited by the deal struck at the European economic summit. I warned that there were many gaps in the plan and much of the rally probably was due to short sellers covering their bets. The coverage this week consisted largely of exploring the shortcomings of the plan. By Thursday, the commentary was decidedly negative with IMF head Christine Lagarde saying that Europe’s recession was escalating and would be difficult for other nations to avoid being caught in.
As a result, risky assets generally were flat to down for the week and flight-to-safety assets gained. Here are the details.
The Data
The most important data this week probably came from China instead of the U.S. An official reported that growth in China is below 10% and is likely to stay in single digits in the future. He indicated that the explosive growth of recent years isn’t sustainable, and government officials don’t expect it to continue. That forces recalculations by many investors who believed China’s high growth would continue for years to come and that this would support growth in other Asian markets and the global economy.
In the U.S. retail sales ended a two-month string of surprisingly strong gains. They rose in November, but less than expected and less than in October. The good news it that both September and October sales were revised upward. Distorting the data the last few months were auto sales. They sagged in mid-year because parts shortages from Japan’s earthquake prohibited manufacturers from producing enough supply. Much of the high auto sales in recent months were the result of pent-up demand. That period is over, so auto sales are returning to a normal level. There’s no doubt that household spending has been strong the last few months, and that’s been supporting the economy. There is doubt that spending can remain this strong without a matching gain in household income.
Some retail stores started to solve the mystery this week. They announced profit margins were being squeezed because they ran big discounts to get consumers into the stores. That boosts gross sales but reduces profit margins.
Weekly unemployment claims were strong and surprisingly positive for the second week in a row. They fell to 366,000 for the week, bringing them well below 400,000 for two consecutive weeks. It’s the lowest level since May 2008. The good news in this data is that businesses are firing fewer employees and could be moving toward a normal level of 250,000 or so. The bad news is that a separate report called JOLTS from the Department of Labor indicates that few employees are voluntarily leaving jobs and employers are hiring at a rate far below average. Those factors are keeping the number of unemployed high and compensation increases low.
As I expected, the week’s data continued to show that inflation for this cycle peaked and now is declining. The rising dollar kept a lid on import prices. They declined in October, and rose modestly in November. When petroleum prices are excluded, import prices declined. This bodes well for inflation data. Export prices also rose modestly following a decline the previous month. Producer Prices rose but at a modest rate. The biggest increase was in food. The most-watched inflation gauge, the Consumer Price Index, showed no gain in the “headline number” and a modest 0.2% increase when food and energy are excluded. Energy prices declined 1.6% after a 2% decline in October, led by gasoline prices declining 2.4% after a 3.1% drop in October.
The Federal Reserve Open Market Committee met and issued its statement during the week. The main news was that it expects continued slow economic growth. It said the housing sector remains depressed and business fixed investment appears to growing more slowly.
Manufacturing, which has been a major drive of the economy since the 2009 bottom, delivered some mixed reports. There was a sharp increase in the Empire State Manufacturing Survey. This is a sharp change from the reports since June that were either negative or modestly positive. The Philadelphia Fed Survey also showed a sharp increase. Both reports listed increases in new orders, which indicates growth should increase in coming months. Industrial Production, however, came in at a negative number following a surge the previous month. In addition, the report showed capacity utilization is below its peak for this cycle. The three reports can be reconciled. The IP report covers final goods. The other two reports also cover new orders and had strength in them.
The Markets
Emerging markets continue to lead world markets lower, and China’s markets led the way. Chinese stocks have been laggards all through 2011 and have substantial losses for the year. Check the item under “Some Reading for You” for details. U.S. stocks actually lost a little more than the emerging markets for the week, taking about a 2% hit. The EMs rose on Friday while the S&P 500 declined.
The only asset class performing worse than emerging markets these days is commodities Gold suffered for the week as did broader commodity indexes, with gold coming in the worst with a 4% loss for the week. It recovered on Friday after being down 6% for the week on Thursday’s close. Commodities in general are declining because of worries about global economic growth and also because inflation is declining almost everywhere. Some prominent analysts also forecast declines for gold, and that triggered some selling. Another source of selling probably was hot money that bought as gold spiraled upward last summer now is selling as the price declines.
The week’s winners were treasury bonds and the dollar. It clearly was a flight-to-safety week. Long-term treasuries rose almost 4%. Surprisingly, high yield bonds have been holding up well despite concerns about the economy. Normally high yield bonds follow stocks closely. Instead, they were about even for the week. Investment grade corporate bonds also held their own for the week with a slight increase.
Some Reading for You
A top Chinese economist stated that China’s economic growth is below double-digits and that he expects it to stay there. He believes that China’s long period of hyper-growth is over and that the government is trying to engineer moderate and reasonable growth.
Many people don’t understand how the European sovereign debt crisis has grown into a banking crisis that is causing a large deleveraging and slower economic growth. You can read some details of the process here.
The National Association of Realtors announced that it found mistakes in its housing market reports for 2007 forward. It will restate the data on Dec. 21 to show that the market was worse than it was reporting. Also read this piece on the subject.
I comment on these items and more on my public at http://www.bobcarlson.net.
December 10, 2011 09:00 a.m.
Your Retirement Finance Week in Review
There’s no doubt that the European sovereign debt crisis is moving the markets and influencing the global economy. There wasn’t much data during the week, but what was issued was generally positive. Yet, the markets ignored the data and responded to news from Europe.
There were rumors all week, but the major news came out on Thursday and Friday.
On Thursday, the European Central Bank made clear that it would support the liquidity of banks. It expanded the list of assets it will accept as collateral for loans to banks. This is important, because most European banks are shut out of traditional private sector lending and funding sources. But the ECB also made clear that it won’t print money by purchasing a wide range of government loans and other assets. The ECB won’t engage in quantitative easing such as the Federal Reserve did. Instead, Europe will have to rely on fiscal discipline and austerity to put the crisis behind it. European government leaders did announce general agreement for a tighter fiscal union with some teeth, but it won’t be an operating reality for some time.
The markets seemed to like the news, but I think they’re overlooking the lack of immediate impact. Europe now is in the process of an extended deleveraging without the offset of quantitative easing. Banks have less capital, so they have less money to lend. Many governments also are pulling back to reduce debt. All that’s bound to reduce economic growth in Europe and elsewhere. The questions are how much growth will decline and whether the Fed will be spurred to initiate a new round of quantitative easing.
The Data
Consumer credit grew modestly. This is an important report, because in recent months retail sales have been rising much faster than household incomes. This is mostly financed by reducing savings, which can’t continue for very long. But it can continue if consumers borrow at the low interest rates that are available. Much of the growth in borrowing was in credit cards. This offsets a decline in auto loans. Longer-term, consumer credit growth has been very modestly higher since June and much of the increase in recent years has been in auto loans and student loans. Mortgage loans still are very low because of low home values and tight lending standards. Taken together the data indicate consumers still are reluctant to borrow, even at very low interest rates, and the economy still is deleveraging.
The mid-month Consumer Sentiment survey from the University of Michigan rose more than expectations. That’s a positive sign. But the increase is from the deeply depressed levels of August and still is closer to the levels of 2009 than early 2011.
The initial jobless claims were a substantial improvement from the previous week. New claims were only 381,000, well below the previous few weeks and forecasts. The figure also helped bring down the four-week moving average a bit. New claims now are around their lows of early 2011. The question is whether they can break below this level, indicating a steady improvement in the job market, or will bounce back above 400,000 in coming months.
The trade report continued a recent pattern of imports declining moderately while exports increased gradually. The major movers in the data were oil and gold.
The major report on the service sector, the ISM Non-Manufacturing Index, declined a bit from last month and was well under expectations. It still stayed above 50, indicating modest economic growth. The major contributor to the decline was a fall in employment, following weak new orders in previous months.
Factor orders declined for October. New orders were down, and inventories increased. Perhaps when the report for November comes out it will show an increase to match other data already released for November’s activity.
Taken together, the sparse amount of data released during the week confirm a slowly-growing economy with some signs of improvement but not strong enough to be confident that growth won’t slip in the new year.
The Markets
It was a wild week with most assets declining for the week despite strong gains on Friday. The returns were mostly negative through Thursday because of rumors that the big conference in Europe would be a bust with no deal. They soared on Friday after the deal was announced. Next week will be more interesting as investors have time to consider the longer-term effects of the deal.
Long-term treasury bonds were the counter-balance in the markets. They rose through the close Thursday, and then fell about 2% Friday to make them even for the week. Some other bonds didn’t fare as well. TIPS lost a small percentage for the week. International inflation-indexed bonds were down about 1.5% by Thursday’s low but climbed back to close to even for the week.
Investment grade and high yield corporate bonds traded within narrow ranges for the week, narrower than for the other assets. High yield ended with about a 0.5% gain for the week, while investment grade bonds had a slight loss.
Stocks generally were down. Emerging market stocks fared worst, down over 4% at their lows on Thursday. They recovered enough Friday to narrow the loss for the week to about 2.5%. The S&P 500 did better. It was down a little over 2% at its lows and recovered to be almost even for the week.
Commodities didn’t fare well all week, and didn’t recover as much as equities on Friday. The Dow Jones-AIG Commodities Index and the Goldman Sachs index both were down 3% at their lows on Friday. The Goldman index, which has a heavier allocation to energy, had a slightly higher recovery on Friday. Both were down more than 2% for the week. I consider commodities to be a good leading indicator of what’s happening in the emerging economies. Their weakness all week indicates growth isn’t rebounding in those economies. Gold also fared poorly and was very volatile for the week. It fell sharply on Wednesday and recovered a small amount on Friday. It was down more than 1.5% for the week.
The dollar traded in a narrow range and ended the week about even.
In our portfolios, Vanguard Long-Term U.S. Treasury Bond had a modest loss for the week. Tocqueville Gold had a volatile week and ended with a loss around 5%. Neither came near our sell signals.
Some Reading for You
Changes continue to roil the annuity market. Insurers have been withdrawing from some sectors of the market and changing their offerings. In the latest news, John Hancock announced it will discontinue a wide range of annuities. It says low interest rates and market volatility make it difficult to manage them profitably.
I always encourage readers to read the latest quarterly shareholder reports from some key fund managers. The third quarter reports are coming out now. Take a look at the latest from Hoisington Investment Management and Jeremy Grantham of GMO.
Income equality is in the news lately. Read this analysis of the data for one perspective.
I comment on these items and more on my public at http://www.bobcarlson.net.
December 2, 2011 05:00 p.m.
Your Retirement Finance Week in Review
Tighten your seat belts and other safety restraints, as I said at the opening of the December issue of Retirement Watch. The markets are all about Europe, and they’re going to be volatile as European finance ministers lurch toward their big meeting Dec. 9. The attempts to downplay and paper over the debt crisis have failed. The idea that all they needed to do was to restore confidence also proved a failure. Now, the ministers need to come up with a plan that results in some debt default, shores up the banks that made the loans, polices the fiscal policies of EU nations going forward, and ensures the economy has enough liquidity. It’s a tall order, but it’s necessary because they dithered with half solutions for so long. Now, the European Central Bank is considering putting its concerns about inflation to the side and buying up more loans from the troubled banks. In other words, the ECB is being asked to print a lot of money and use it to purchase very bad assets.
The European banking system is close to spiraling out of control. It’s so bad the central banks decided they needed to take dramatic action on Wednesday. I posted a summary and thoughts about that on Bob’s Journal on the members’ web site on Thursday.
There was a lot of economic news in the U.S. issued during the week, much of it surprising on the positive side. But economic data doesn’t matter as long as the uncertainty of the European debt crisis hangs over the markets.
The Data
Before looking at the U.S. data, consider the global picture. U.S. manufacturing data has been strong for a while, and that continues in the recent data. But globally manufacturing is slowing and at an accelerated pace, according to The Wall Street Journal. Eurozone manufacturing has been declining for several months, and many economists assume Europe is in a recession in the fourth quarter. Recent information from China also shows its manufacturing sector declining. Other Asian countries also are showing manufacturing contractions.
Meanwhile in the U.S., as I said, there were some strongly positive data surprises this week. David Rosenberg of Gluskin Shef said he suspects the positive surprises likely are the result of lags between what’s happening now and what’s being reported about the past. As you probably know, I expect the economy to slow down in coming months because incomes are not increasing, as you’ll see in some of the data below.
The first positive surprise was the Conference Board’s Consumer Confidence Index. It rose to 56.0 from 39.8 the previous month and well above the 45.0 expectation. That was the largest increase in some time and out of line with previous gloomy measures. Consumers were more confident about the ability to find jobs and the prospects for higher income in six months. It’s hard to explain this sudden jump. But if it continues it’s important, because consumer sentiment is good at forecasting upcoming consumer spending. In recent months retail spending was well ahead of sentiment, and I’ve been expecting sales growth to decline and come in line with sentiment.
Another positive surprise was the Chicago Purchasing Manager Index. It increased again and above expectations. The PMI is forecasting growth in the economy. There was a surge in new orders and an increase in order backlogs. These measures rose the most since last spring.
The broader-based Institute of Supply Management manufacturing index confirmed that with an increase that was above expectations. New orders were much higher, and lower prices also helped. Negatives in that survey were a reduction in backlogs and slower hiring. The absolute measure still is consistent with below average growth.
Retail sales were a disappointment during the week. On Monday there were anecdotal reports and estimates of strong Thanksgiving weekend sales. But retailer reports on Thursday were very different. They were weaker than expectations, and most retailers are cautious about the rest of this year and 2012. Some key retailers (Wal-Mart, Amazon, and Best Buy) did participate in the reports, and they are believed to be among those who did best over the weekend. It appears that high-end retailers are doing well as are some that cater to discount shoppers. But stores that seek middle-income customers are a mixed bag, with many reporting disappointing sales. Another concern is that retailers used so much advertising and discounting to attract shoppers over Thanksgiving weekend that they merely pulled sales from the rest of the holiday season into that weekend.
The employment reports usually move markets. The first employment report of the week, the ADP employment report, showed a sharp gain in new payrolls at 206,000, compared to an expectation of about 125,000. But then the weekly report of new unemployment claims showed an unexpected increase to 402,000, above the key 400,000 level.
The main employment reports on Friday generated a lot of positive headlines after they were released, though I had trouble understanding that and people seemed to have second thoughts as Friday went on. The headline number was that the unemployment rate declined from 9.0 to 8.6%. Payroll growth also increased from last month’s 80,000 to 120,000. Also, payrolls for the last two months were revised upwards. But 120,000 net new jobs in a month is mediocre. It’s not enough to make much of a dent in the number of people unemployed and was below expectations. Also, average hourly earnings actually declined, and the average workweek stayed the same. Also, when you delve into the details of the report a lot of the new jobs were temporary or in low wage sectors such as retail and lodging. Also, the unemployment rate declined largely because of a reduction in the number of people participating in the labor force.
The housing data for the week continued to indicate the residential housing market is bouncing along the bottom. This shows how bad the housing market is, because mortgage rates declined steadily and are at record lows. New home sales rose a bit, but that is after the reported sales from the previous two months were revised down. The median price declined. The Case-Shiller Housing Price Index showed that home price nationwide declined again in September and have declined 3.6% over 12 months. Prices are hitting new lows in some of the hardest hit areas in this crisis. The lower prices are helping sales, but they’re also putting more current homeowners in distress. The Mortgage Bankers Association reported that its four-week moving average of applications for new home purchases increased. Finally, on Thursday it was reported that foreclosure inventory is at an all-time high.
Homes are very affordable now in many areas. Prices are low and falling. Mortgage interest rates are low. One problem is that there still are a lot of homes on the markets, and more on coming on because of distressed owners. Also, reports are that lenders have very tight standards. Many people who want to buy homes can’t qualify for mortgages or give up after the application process takes too long.
Productivity increased, but at a lower rate than expected and less than in previous quarters. Productivity has declined steadily since late 2009. The
