December 2013
December 20, 2013 04:50 p.m.
Your Retirement Finance Week in Review
We’ll be on a reduced schedule the next couple of weeks. I won’t send a letter next Friday, December 27, and probably won’t send one on January 3, 2014. I hope everyone has a good holiday season.
I look forward to meeting you at the Orlando World MoneyShow January 29-February 1, 2014. The conference is going to be at the Gaylord Palms Resort & Convention Center. Conference attendance is free. To register, set your web browser to www.WorldMoneyShow.com and use source code 034009 or call 800-970-4355.
I know many of you wanted to join our recent webinar with TJT Capital but were unable to. The webinar, titled “Challenges Investors Face: How TJT Capital Manages Portfolios to Participate in Bull Markets and Protect Capital in Bear Markets”, is available for reply here. I discuss these webinars in my role as Managing Member of Carlson Wealth Advisors, L.L.C.
The week was full of good news for many investors, but not for all of them. The Fed finally acted, taking a lot of uncertainty out of the markets. Investors began to realize that it might not be a bad thing if the Fed reduces its bond buying because the economy is doing well. The Fed announced a very modest change in its bond purchases and stressed that any future actions will depend on the economic data. It is prepared to return to its previous policy if the economy appears to weaken. The Fed also stressed that interest rates will remain low after unemployment declines to 6.5%.
On top of that, most of the recent economic data was positive. It’s been an early Christmas for investors.
This doesn’t mean we’re going to have smooth sailing in 2014. While the U.S. economy looks steady and the potential for disruptions from politicians is substantially reduced, there are other things to watch out for. The Fed could tighten too aggressively. If it does, it now has limited tools to pull the economy out of a downturn.
The rest of the globe also presents the potential for problems. Europe has been steady for over a year, but its problems aren’t solved by a long shot. More importantly, the European Central Bank and other policymakers don’t seem inclined to take strong measures. Instead, they do whatever is necessary to make it through the current crisis. Much of the continent remains in a depression and shows little signs of recovering. In 2014 a lot of loans will come due and other events will occur that require tough decisions to prevent another crisis.
China is a wild card. Recently it took efforts to try to slow its growth, especially the growth of its debt. A number of other emerging economies depend on China for their growth, so there is something of a domino effect when China’s growth rate changes. There also are problems in India, Brazil, South Africa, and a few other emerging economies. They are manageable but could spin out of control if the wrong policy moves are made.
We’re closing 2014 with a positive picture. But we can’t set-it-and-forget-it with our finances. We need to be alert for changes both in the U.S. and around the globe.
The Data
Friday’s GDP report was much better than expectations. This is the third and final revision of third quarter GDP. All data at the time indicated the economy was slowing, and a growth rate of 2% or less generally was expected. Instead, the first estimate came in higher than expected, and each estimate was revised higher. The first and second estimates were higher than expected because of high business inventory levels. Those usually are reversed in future quarters and aren’t signs of real growth. But the third revision pushed the growth rate to 4.1% annualized, and the increase was due to higher numbers for retail sales, especially in the service sector. Businesses also invested more in software.
In a separate report, corporate profits for the third quarter were revised sharply higher than the initial estimate but still higher than the second quarter.
Those numbers indicate the third quarter was better than most economists expected, and the recent data indicate the fourth quarter is closing higher than the third quarter.
Most of the rest of the week’s reports had to do with manufacturing and housing.
In manufacturing, the Empire State Survey has been one of the two laggards among the regional reports recently and continued that this week. It showed positive growth, better than last month’s negative growth, but still week and below expectations. Industrial production, on the other hand, was sharply higher and indicates strong manufacturing activity almost across the board. The PMI Manufacturing Index Flash also was positive. The Philadelphia Fed Survey, which has been on of the laggards recently, turned in a solid, improved number but still below expectations. The Kansas City Fed Manufacturing Index was slightly negative for December, but survey respondents were generally positive about coming months and blamed the month’s slowdown on the weather.
The Index of Leading Economic Indicators increased sharply, which is supposed to indicate rising growth ahead.
After a few months of declines, the NAHB Housing Market Index rose sharply to return to the post-recovery high it reached in August. This indicates home builders generally are seeing strong activity and are positive about the next six months. Housing starts also increased sharply. Unlike some past months of high starts, there was a strong increase in single-family homes instead of the increase being concentrated in apartments.
Existing home sales declined for the fourth consecutive month, but that’s not necessarily negative. Much of existing home sales the last few years have come from distressed and bank-owned sales. And the sales mostly were to all-cash investors. Now, the number of distressed sales are down and investors are a smaller part of the market. Part of the decline also is due to a shortage of homes for sale.
Overall, the residential housing market seems to have adjusted to the mortgage interest rate increase earlier in the year. The market seems to be on track for steady gains in 2014.
Consumer prices were steady for the month after a slight decline the previous month. Declining energy prices were the main factor. Excluding food and energy, prices rose 0.2% for the month and 1.7% for the last 12 months.
New unemployment claims rose 10,000, which is more than expected. The four-week trend is little changed.
The Markets
U.S. stock investors had a very good week, but it wasn’t as good for international stock investors and those in some other assets.
Almost all the U.S. stock returns came after the Fed’s announcement on Wednesday afternoon. Small U.S. company stocks led the way, with the Russell 2000 index climbing 2.5%. The DJIA was next with about a 1.8% gain. It was up 2% before a quick drop in the last hour Friday. The S&P 500 gained 1%, and the All-Country World Index gained 0.5%. Emerging market equities had another bad week. They lost 2.5% and weren’t positive all week.
It was a mixed week for bonds. Long-term treasuries were down most of the week but bounced on Friday after investors slept on the Fed’s news. They had a sharp gain on Friday to register a 0.7% gain for the week. Investment-grade bonds were in positive territory all week and finished with a 0.4% gain. High-yield bonds were in a narrow range all week and finished with a marginal gain. Treasury Inflation-Protected Securities (TIPS) had the worst week, losing 0.4% and being down most of the week. With inflation tame, investors don’t feel a need to own the bonds.
Commodities also had a mixed week. Gold was hammered, though it had a small recovery on Friday. On Thursday it closed at its lowest level since 2010 and it lost over 2.5% for the week. Broader-based commodities and energy-based commodities tracked each other closely all week and closed with identical gains of around 1.25%.
The dollar gained 0.5%.
Some Reading for You
Here’s a good summary of the recent housing data.
Here are Seth Klarman’s 20 forgotten lessons from 2008.
This is a summary of bullish, but not too bullish, arguments for U.S. stocks.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
December 13, 2013 05:45 p.m.
Your Retirement Finance Week in Review
My webinar this week with TJT Capital attracted more interest than any of our previous webinars. Yet, many who were interested weren’t able to join us. For them, and others who now are interested, a replay is available on the TJT Capital web site. To view it, click here. When I discuss these webinars I do so in my capacity as Managing Member of Carlson Wealth Advisors, L.L.C.
The Dow Jones Industrial Average managed to eke out modest gains on Friday, but that was the only good news from stock markets this week. The S&P 500 suffered four days of losses. Both the DJIA and the S&P 500 had consecutive weekly losses for the first time since October 4. The Nasdaq joined the trend, ending a four-week winning streak.
There wasn’t much economic news this week to influence investors. We even had what should have been viewed as positive news: a two-year budget deal in Washington. Stocks held up better during the partial government shutdown earlier in the year than after this deal was announced.
It could be that investors were anticipating next week’s Federal Reserve Open Market Committee and again anticipating a reduction in bond and mortgage buying.
I wouldn’t read too much into these last two weeks, though the trend bears watching. We’re in the last month of the year, and investors make a lot of portfolio adjustments during this period, adjustments that often have nothing to do with the performance or an investment or the outlook for it. Also, we’ve had a very strong investment period. It is normal for investors to take some profits or rebalance their portfolios after an extended bull run.
My long time advice is not to make investment decisions based on what happens in the last few weeks of the year. Momentum still is positive for U.S. and European stock markets, and the supporting monetary and credit policies remain in place. It will take more of a decline than this for me to conclude there’s a major change.
The Data
The major report of the week was retail sales. They indicate strong household demand and a big Christmas buying season. The latest month’s retail sales rose and rose higher than expectations, and last month’s number was revised upward from what was considered a strong number to begin with. Even after excluding auto sales, the numbers still were strong. This report is consistent with the recent increases in consumer confidence. Changes in confidence generally are followed by retail sales changes.
The issue is whether such growth can be sustained. Household income hasn’t increased enough to fund these sales. Consumers generally are reducing savings. Rising home and stock prices fuel optimism and make consumer secure enough to do this. If businesses react to this increase in demand by expanding, hiring, and increasing wages, the growth could be sustainable. But if incomes remain stagnant, this level of growth isn’t likely to be sustained.
The report, when considered with other recent data, gives the Fed a basis for reducing its bond buying at next week’s meeting and indicates growth might be sustainable with less stimulus.
The Small Business Optimism Index from the NFIB rose a bit and in line with expectations and after a sharp drop the previous month. The best part of the report was an increase in plans to hire more employees.
Producer Prices actually declined in the last month. A major reason for this was the decline in gas and other energy prices.
A detailed snapshot of the labor market is the JOLTS (Job Openings and Labor Turnover Survey). It indicated that not much has changed in the job market. The number of people willing to leave their jobs voluntarily was unchanged. This number is a way of gauging the job market. If people think it will be easy for them to get a new job they are more likely to leave voluntarily. On the positive side, layoffs and terminations declined a bit. All in all, it indicates slow but steady improvement in the employment market.
New unemployment claims had a sharp increase after hitting a low last week. The number generally isn’t a good measure of activity during holiday periods.
The Markets
It wasn’t a good week for most investors.
Emerging market stocks were big losers, declining 3% and losing value steadily during the week. The rest of the major indexes clustered with losses between 1.75% and 2.25%. The Russell 2000 Index of Smaller U.S. Companies lagged the group, losing 2.25%. The All-Country World Index was not, followed by the S&P 500. The DJIA did best of the stock indexes, losing only 1.75%.
Bond investors did a little better. High-yield bonds did worst of the fixed income investments, losing about 0.2%. Clustered around break-even for the week were long-term treasuries and Treasury Inflation-Protected Securities (TIPS). Investment-grade bonds eked out a gain of about 0.3%.
Commodities also didn’t do much for their owners. Energy-related commodities fared the worst, losing just over 1%. Gold had a wild week but finished around break even. Broad-based commodities gained about 0.4%.
The dollar recovered from an early week decline to break even.
Some Reading for You
You shouldn’t pay attention to investment predictions. Look at this scorecard of Byron Wein’s year-old outlook for 2013.
Bill Gross of PIMCO tells us what he’s worried about as we round out 2013.
James Montier of GMO, in “No Silver Bullets in Investing” takes apart some recent innovations.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
December 6, 2013 04:55 p.m.
Your Retirement Finance Week in Review
This is the last call for my next webinar with TJT Capital. The focus will be on helping investors select a strategy and structure for their portfolio management. I’m looking forward to it and hope you are, too. There still are some spaces available, so act now if you’re interested. It will be on Dec. 10 at 3:30 p.m. eastern time. The title is “Challenges Investors Face: How TJT Capital Manages Portfolios to Participate in Bull Markets and Protect Capital in Bear Markets.” You can reserve your space today by clicking here. I discuss these webinars in my capacity as Managing Member of Carlson Wealth Advisors, L.L.C.
Stocks had their first negative week for a while this week, though they had a solid day on Friday. There were several reasons for the weakness. One reason, of course, is that U.S. stock indexes had eight positive weeks in a row. It was inevitable that would end.
There also were several negative reports from overseas early in the week. China plans to deliberately slow its growth rate. This would reduce global growth and especially harm commodity-based economies that depend on exports to China for growth. News from Brazil indicated that country continues to struggle with the fading of the commodity boom. Europe, after being under the radar for about a year, raised new concerns with investors. There are signs of deflation in the continent. Cyprus is likely to need a new bailout. The coming bank stress tests are likely to reveal problems that will need fixing in coming months.
The biggest problem for U.S. markets probably was the latest Beige Book from the Fed. Most recent economic data indicate that the economy slowed after interest rates rose in May and June. The question among most investors is whether this slowing is temporary. In their peculiar way of thinking, a majority of investors seem to believe that if the economy is strong, or too strong, the Fed will reduce its bond buying and that will be bad for markets. But if the economy is weak, the Fed will remain active at its current levels, and that will prop up markets.
That brings us to the Beige Book. The book portrays a stronger economy than most of the data. It repeated the statement from the previous book that the economy is growing at a moderate to modest pace, with most district banks reporting the higher moderate growth rate. There also were indications in the book that growth is improving in some areas. For example, the book reported more frequent pockets of shortages of skilled labor than in the past. It also reported a moderate increase in household spending in the last six weeks.
Households absorbed the tax increases and fiscal tightening of early this year by reducing savings. The economy slowed hardly at all. They didn’t adjust to higher interest rates quite as quickly. We saw clear slowing in housing and retail sales. But housing prices continued to appreciate, though at a slower rate, and stock prices rose. Plus, interest rates are lower than their peaks earlier in the year. I suspect barring any shocks this should be sufficient to cause growth in 2014 to rise to the 2.5% to 3% rate of early 2013.
As you’ll see below, investors seemed to change their views about the Fed and economic growth after positive employment and other reports were issued on Friday. Most seem to realize finally that if the Fed is less stimulative because the economy is strong, that’s a good thing.
The Data
There was a lot of data issued this week. Let’s start with the market-moving employment reports, though as I’ve said in the past I believe there is too much attention paid to these.
The preliminary reports of the week were positive. The ADP Employer Report showed much higher job growth than expected and than has occurred in recent months, 215,000. Also new unemployment claims declined below 300,000 for the first time since September and the second-lowest level of the recovery. But the Thanksgiving holiday might have distorted the numbers.
The two employment situation reports on Friday continued the generally positive news in the headline numbers. More jobs were created than expected at 205,000, and the two previous months generally positive numbers were increase in the revisions. Also, the unemployment rate declined to 7%, the lowest in five years.
Peering below the headline numbers the reports were as positive. The unemployment rate declined so much because a large number of people continue to drop out of the work force. Employment increased by only 83,000 from September through November. The question economists are debating is: Are people leaving the workforce because they’re getting older or because they’re giving up on finding decent jobs?
The numbers in the report I follow more closely are hours worked and average hourly earnings. These were both up very modestly and at expectations.
While media reports said investors would be concerned that the strong employment report would create worries that the Fed would reduce bond buying, stock indexes surged. That’s likely because investors finally realize that if the Fed reduces bond buying because of strong economic data, that’s good for stocks and economic growth. Investors also might have realized that despite the headline numbers the economy isn’t all that strong, so the Fed isn’t going to tighten monetary policy soon.
Let’s move to broader economic data.
Investors also might have liked Friday’s Personal Income and Outlays report which showed consumer spending continuing to increase in line with expectations. This occurred despite a decline in personal income. The decline might be the result of the partial government shutdown. Another positive in the report was a modest gain in prices as measured by the PCE index, indicating there is no reason for the Fed to worry about inflation.
The third major report issued on Friday also was positive. Consumer sentiment as measured by the University of Michigan rose sharply and was the best reading since the recovery peaks of May-July. Optimistic consumers usually are an indication of rising retail sales in the next few months.
The final GDP report for the third quarter was revised upward to a 3.6% annual growth rate. This is higher than the initial two estimates and much higher than expectations. But the increase was due mostly to an upward revision in inventory growth. This indicates sluggish demand and businesses producing more than can be sold. Also, inventory rises and falls tend to even out over time, so this likely will be washed out in the next report or two. This is consistent with the positive, but slowing growth seen in other data.
Likewise, the ISM Non-Manufacturing Index showed positive growth but was lower than the previous month’s number and below expectations. The good news in the report was strong growth in new orders.
Corporate after-tax profits, as reported by the Department of Labor, rose at a faster rate in the third quarter. On a 12-month basis they increased 5.8%.
The manufacturing reports for the week were generally positive. The PMI Manufacturing Index came in higher than the previous month and than expectations, indicating solid growth. Likewise, the ISM Manufacturing Index came in well above expectations and at its highest level in two and a half years. In both reports, new orders were strong. But Factory Orders were down, and after subtracting the volatile transportation sector were unchanged.
These reports continue a trend of mixed reports on the manufacturing sector. It clearly slowed in the face of lower household spending over the summer and early fall. Some data indicate manufacturing might be picking up, while others, such as factory orders, point to a continuing stall.
There also were several housing reports this week. Two months of reports on construction spending were issued and were mixed. The September report showed a good increase in single-family residential construction, while the October report showed a decline of 0.6%. There also were two months of reports on new home sales. New home sales declined in September but surged in October, rising 25.4%. New home prices actually declined 4.5% in October, perhaps helping sales.
I usually don’t report on the Mortgage Bankers Association weekly report on new mortgage applications. I’ve found it doesn’t seem to do a good job of forecasting other activity or data. Here’s a good explanation of why. Basically, the index is skewed toward the largest lenders, excluding smaller mortgage lenders. Recently, large banks cut back their mortgage lending while smaller lenders are taking about 60% of the market. A lot of that lending isn’t reflected in the report.
The Markets
It was a bad week for stocks around the globe, though Friday’s economic reports allowed them to recover a lot of their losses. Emerging market equities fared the worst, losing over 0.6%, though they were down almost 3% earlier in the week. The Russell 2000 U.S. Smaller Companies Index had a similar loss. The All-Country World Index lost 0.4% (down 1.7% earlier in the week), whiel the Dow 30 lost only 0.1%. The only winner was the S&P 500 with a 0.1% gain (down 1% at Thursday’s close).
Bonds and the dollar also fared poorly. The dollar lost 0.7%, though it was up until Thursday. High-yield bonds lost a fraction, while Treasury Inflation-Protected Securities (TIPS) lost 0.75%. Long-term treasuries did the worst, losing over 0.9%, recovering some ground on Friday.
Commodities were the only positive performers for the week, but not gold. It lost 0.5% and was down more early in the week. Energy-related commodities gained almost 2% while broad-based commodities returned almost 1.5%.
Some Reading for You
Here’s a good review of seven mistakes to avoid in the first year of retirement.
Ukraine might be the next global financial problem.
Are stocks overvalued? I like this review of the 10-year average of corporate earnings valuation method.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
