February 2012
February 25, 2012 04:50 p.m.
Your Retirement Finance Week in Review
The big news this week came largely from overseas. One action that didn’t receive enough attention was from China. It decided to engage in another major round of its version of quantitative easing. That shows that China’s economy is slowing more than many observers realized. It also means there’s a fresh flood of money coming into the world economy. That’s likely to lead to higher commodity prices.
In Greece the latest phase of the long-term bailout cycle was agreed to. Of course, soon after a deal was announced analysts pointed out its shortcomings and how it doesn’t solve the problem. You can read good news and commentaries here, here, and here. Here’s all you need to know. Greece is insolvent. A large portion of the debt it owes, probably between 60% and 70%, won’t be paid. There can be an organized default or a chaotic default. The latest deal affects only the debts that are coming due in the near future. Debts that mature after that aren’t affected and will need their own deals at some point. The solvent European governments, the ECB, and the IMF basically are trying to delay things until the banks that made the loans can build up their capital so they can absorb the losses. The policymakers also need to decide whether they will give money directly to Greece as they’ve been doing or let Greece default and shore up the banks and other key debtholders.
Another key international event came from the ECB. I’ve been pointing out that in mid-December the ECB announced its form of quantitative easing. It’s a massive problem designed to prevent a contagion of bank failures. Last week, for the second time in a few weeks, the ECB took some pains to indicate its easing program isn’t unlimited and that it might contract it soon. Last week’s efforts were anonymous statements to the media. You can read it here. At this point, it’s hard to tell if there’s a real contraction or it is merely jawboning or the floating of trial balloons. But it’s something we need to follow.
The Data
This was a very quiet week for U.S. economic data. The main data probably was from housing. Investors became concerned when the existing home sales report revealed that sales rose at a nice clip (4.3%) but that largely was aided by lower prices (a 4.6% price decline). Also, inventories are falling, which many now attribute to a temporary suspension of foreclosures. That will reverse course soon and could result in a steady increase of homes onto the markets. New home sales data reported on Friday showed that demand for new homes still is weak despite low mortgage rates.
Some housing market data over the last month triggered optimism among a number of analysts. But overall the data still show the residential market is scrapping along the bottom and will remain at or near the bottom for some time.
Weekly new unemployment claims were a positive indicator at 351,000. That’s in the band of the last couple months and indicates there probably will be good gains in the next employment report.
The Reuters/University of Michigan Consumer Sentiment Index was flat. That’s an improvement from the 2008 lows, but overall the Index is well below its historic average.
The Markets
The markets were dominated by commodities this week, especially oil. The Goldman Sachs Commodities Index, which is dominated by energy, rose over 4%. The Dow Jones counterpart, which is more diversified, rose less than 3%. Gold rose just under 3% but declined on Friday while the other two indexes continued to rise. Not surprisingly the dollar declined about 1%. There’s often a continuing debate whether a fall in the dollar causes commodity (especially oil) price to rise or vice versa. But this week it seems clear that events in Iran are pushing oil prices higher.
A surprise is that emerging market stocks were flat for the week. Often these rise with commodity prices. U.S. stocks also were basically flat. High yield bonds and investment grade corporate bonds increased less than 1%. Another surprise is that long-term treasury bonds rose more than 1% for the week after falling early in the week. Frequently, treasury bond prices decline when the dollar falls and oil prices rise.
The market activities for the week generally were determined by political events in the Middle East and Europe. U.S. stocks also are taking a break after their gains since last September. Earnings reports were not as strong as in recent quarters, and the economic data no longer is delivering strong positive surprises. So, investors will pause to see if economic recovery has momentum or will stall again.
Some Reading for You
There’s probably going to be a surprisingly bad report about the status of Social Security when the trustees issue their report this spring. Read why here.
I think the best summary of the recent Greece debt deal is by John Taylor Stanford here.
“12 Ways to Live a Better Life” is digested from a book, 30 Lessons in Living, in which a gerontologist interviewed more than 1,000 Americans older than 65.
I comment on these items and more on my public at http://www.bobcarlson.net.
February 20, 2012 09:15 a.m.
Your Retirement Finance Week in Review
Before we look at the latest week’s economic data and market action, let’s take a longer-term look. I want to consider some surprises that could happen during 2012. Most of these surprises would come from outside the markets, what economists call exogenous events, but still would affect markets.
I think each of these events could occur, but I’m not forecasting any of them will occur or recommending that you position your portfolio to capture expected market action from any of them. What you should take away from this exercise is there are good reasons not to position your portfolio with one economic outcome in mind. Unexpected evens could occur suddenly, and they could quickly move markets in a direction that is harmful to your portfolio. You need balance, diversification, and nimbleness to preserve capital and capture gains in today’s economic world.
So, let’s look at what could happen.
During the summer President Obama could endorse the Bowles-Simpson Commission deficit reduction plan that was proposed last year. The Republicans would be almost forced to accept. It would give the President the initiative and positive opinions for the rest of the campaign. This move also most likely would generate strong optimism among investors and businesses, spurring higher equity gains and economic growth. It also would likely sweep the President to re-election and could help Democrats to large majorities in both houses of Congress.
Things take a more dangerous turn in the Middle East. Iran could prove to be further along in developing nuclear weapons than expected and be willing to use them. Or Israel might bomb parts of Iran in an attempt to disrupt the nuclear weapon production process. There are a number of other potential events. All likely would lead to higher oil prices, pessimism among investors and businesses, and slower economic growth and lower stock prices.
Energy prices could collapse because of technology and policy changes. Drilling in the U.S. for oil and natural gas could accelerate, bringing down domestic prices and probably global prices. This would have the same effect as a major tax cut or monetary stimulus. It would free up consumer cash to either be saved or spent on other items.
Central banks could tighten too soon. This already has happened several times since the global economy hit bottom in 2009. Each time the central bankers realized it quickly and reversed course before triggering a downward spiral. The United Kingdom is the most prominent example, because it’s been six months or more ahead of the rest of the world with its central bank policies. It had a severe economic slowdown in 2011 that almost became a recession before looser money was reinstituted. The European Central Bank actually increased interest rates in 2011 before realizing that was a mistake and reversing course quickly. Unfortunately, coupled with the latest turns of the sovereign debt crisis the ECB didn’t act fast enough to avoid a recession.
In the U.S, there’s pressure from a number of quarters to raise interest rates. Raising interest rates wouldn’t necessarily be the same as tightening monetary policy, but it would scare some people. It would help retirees and conservative investors. Long-term I believe the move would be beneficial, but it could depress growth for a while.
Too much austerity in the U.S. and Europe triggers a downward economic spiral. There’s too much debt in the U.S. and Europe, and a deleveraging pushes an economy toward deflation and declining economic growth. So far, fiscal and monetary stimulus has been offsetting the deleveraging effects. But there’s little appetite for additional fiscal stimulus in either region. There’s also a strong sentiment toward reducing government spending and debt in the U.S. and at least parts of Europe.
We can see the effects of too much austerity in Greece. The country is required to reduce government spending and increase taxes as part of each phase of the bailout plan. Each reduction in government spending and increase in taxes ratchets the economy down another level or two. There are no policies to trigger economic growth being discussed. The greater the decline in economic growth, the less able the country is to pay its debts, and the more austerity that is demanded of it. The pattern is leading to a downward spiral.
The U.S. and Europe need to reduce both private and public debts. This can be done carefully and be coupled with measures that will increase economic growth. But currently this discussion isn’t on the table. The debate is between those who believe the stimulus measures to date weren’t large enough and those who want to significantly slash spending.
Japan slides into a deeper depression, perhaps defaulting on debt. Japan’s been out of most people’s line of vision for a while, but significant events are occurring. It’s been mired in a depression since about 1989. The earthquake and tsunami of early 2011 inflicted serious damage on the economy from which the country hasn’t recovered. Also in 2011 the yen climbed in value against most other currencies. That hurt Japan’s exports, further hurting the economy.
Now, the Japanese economy is in serious condition. There’s the potential the slide will continue. Japan also is heavily in debt. It’s been following policies very similar to those the U.S. adopted since 2008, but Japan’s been at it since the early 1990s. It’s accumulated a huge pile of debt, has poor economic growth, and an aging population that’s going to need more government spending in coming decades. There is potential for Japan to default either directly or through currency debasement in the next few years.
The U.S. imposes big tax hikes on dividends. Dividend-paying stocks were the big winners of 2011. Corporations in general are flush with cash and have been increasing the amount they pay in dividends. Companies that a few years ago wouldn’t even consider dividends now have dividends in place with planned increases or are actively considering implementing dividends.
Part of the attraction to investors is that dividends are taxed at a 15% rate. The President, however, wants to tax dividends as ordinary income, and he wants to increase the top ordinary income tax rate. Even if that proposal doesn’t become law, taxes on dividends will rise in 2013 if Congress doesn’t take action. The Bush tax cuts will expire, and the previous law will be reinstated.
An increase in dividend taxes would be negative for the stock market and the economy. At a minimum, it would cause investors to sell dividend-paying stocks and buy others. They also might sell the stocks and put the money in investments other than stocks. There’s also a good argument to be made that the effects of higher taxes on dividends would decrease economic growth for at least a short period. Perhaps most importantly an increase in the dividend tax would be harmful to the retirees and conservative investors who are depending on the after-tax dividend payments and steady increases in the dividends over time to fund their retirement spending.
We take investment positions based on what we believe is most likely to happen. But a good investor is humble enough to realize things could turn out differently. You need to consider what else might happen and determine in advance how you would react.
The Data
There was some interesting data this week, but none of the major market movers were issued. Retail sales were perhaps the most interesting report. They increased less than expected, but they also had some internal inconsistencies. After excluding autos, the core sales came in close to forecasts. But there also are inconsistencies between this measure and other data on household spending and retail sales. I’ve been pointing out in recent months that retail sales were rising faster than household incomes. The spending was funded by reduced saving and higher credit card borrowing. That can’t continue indefinitely. This week’s retail sales report is a small sign that perhaps households are cutting back their spending.
There’s a sneaky positive point in the retail sales report. It shows that restaurant sales are increasing. History shows people tend to reduce eating out first when they are worried about their incomes and increase restaurant visits after they are more secure about their finances.
There were several reports on manufacturing and producing this week: The Empire State Manufacturing Survey, Industrial Production, and Philadelphia Fed Survey. All confirmed past reports that manufacturing is humming along and is the major contributor to U.S. economic growth. The services sector, which is the major portion of the economy, is lagging.
Small businesses also are lagging. The NFIB Small Business Optimism Index rose a bit for the fifth month in a row, but overall the index still is at low levels
There continue to be some signs of hope in the housing data. This week saw some positive news in housing starts and the homebuilders Housing Market Index. While improvements are nice, the housing market still is at very depressed levels and the positive numbers are modest. Also, mortgage data continues to show that despite record low mortgages rates there isn’t a lot of demand for loans to borrow to buy homes.
This week the inflation reports were issued, and they continue to show inflation is under control. There’s no sign of a new deflation trend, nor was there any reason to raise alarms about easy monetary policy.
The Markets
It’s been a fairly wild, volatile week in the markets, though most assets end the week with modest changes.
In the Feb. 4 issue I alerted you I would be recommending a sale of Vanguard Long-Term U.S. Treasury Bond in the March issue of Retirement Watch. I did that in the issue posted on the members’ web site this week. I also had told you if you wanted to sell VUSTX early you could invest the proceeds in NAESX, Vanguard Small Cap Index. In the March issue I’m recommending Vanguard High Yield Corporate Bond as the better choice for the sale proceeds. If you purchased NAESX and want to make the switch, Vanguard’s web site says there’s no redemption fee for doing so and I recommend that. If you don’t want to make a change so soon or invested in a fund with a redemption fee, you should be fine staying in that fund. But set a sell signal of 7% below the recent high.
Long-term U.S. Treasury bonds rose early in the week to accumulate a 1% gain by mid-Wednesday but declined and logged a loss of about 0.5% for the week.
Energy commodities had the best returns for the weeks following increases in oil and natural gas prices. The Goldman Sachs Commodities Index, which is usually around 80% energy, rose 1.5% for the week. Emerging market stocks, which tend to fluctuate with commodities, were close behind with slightly more than a 1% gain.
The S&P 500 was a few fractions behind, accompanied by the dollar with a gain of just over 0.5% for the week. Investment grade corporate bonds had a modest loss of about 0.25%, and all other investments were flat or slightly positive.
Some Reading for You
There’s been a vigorous debate about the Fed’s zero interest rate policy for a while, and it’s been getting hotter. You can read one good summary in the Financial Times Alphaville and another in Fortune.
There’s a connection between wealth, longevity, and good health, though there are some questions about what the connection means. You can read all about it here.
Most of the reporting about the Greece debt crisis focuses on the financial aspects. You should read this piece about what it’s doing to Greek society and culture, especially the younger generations.
I comment on these items and more on my public at http://www.bobcarlson.net.
February 13, 2012 09:15 a.m.
Your Retirement Finance Week in Review
Investors were optimistic this week until late Thursday. That’s when the European reports started to be negative. You’ve seen the news. The non-Greeks said they want more austerity measures from Greece in return for the next bailout payment. Greece officials said they weren’t interested.
At about the same time reports emanated from Washington that negotiators seem unable to agree on a plan to extend the payroll tax holiday through the end of the year.
What should have received more attention were the reports from the European Central Bank on Thursday. President Mario Draghi gave details about the lending plan the ECB announced in mid-December. He emphasized that the plan is not an open-ended money-creating facility and that banks had to offer high-quality assets as collateral for the loans. Documents issued by the ECB also supported this. I think much of the optimism and market buoyancy the last couple of months is the result of people thinking the ECB lending was much broader than revealed Thursday. It’s another reason to be sure your portfolio has some downside protection.
The Data
This was a very light week for economic data. The major report to me was the Consumer Credit report issued on Tuesday. As I’ve reported before, consumer credit, especially via credit cards, auto loans, and student loans, surged in the last part of 2011. This is a good part of what propelled higher retail sales. Historically, most consumer borrowing is done through mortgages, and the recent rate of credit growth is much lower than during the boom years. The recent type of borrowing might be sustainable, but it won’t grow at a rapid pace and won’t push economic growth higher. With home prices still low and possible due to decline some more, mortgage borrowing isn’t likely to increase soon.
The good news is that this borrowing and the fact that it is being financed mostly by banks indicates that the banks are in much better shape and we are past the worst of the deleveraging. But we’re still a ways from a new leveraging cycle that will propel higher than average economic growth.
We can see the difference in mortgage purchase applications. These are growing but at a modest pace despite very low mortgage rates. Refinancing applications are rising at a faster rate. The four-week average is 5.7%. That’s a nice growth rate, but it’s from a very low base and is very low when the low mortgage rates are considered.
The weekly unemployment claims again was positive at 358,000. This is consistent with the recent data showing that employers aren’t firing people, they’re hiring people more than they were, but the hiring still isn’t enough to put a significant dent in the unemployed. The four-week moving average now is down to 366,000.
On the negative side, the University of Michigan/Reuters Consumer Sentiment Index released Friday declined. Both current conditions and expectations declined. It’s only one month’s data and the first negative reading since August. We’ll have to see if it continues.
The Markets
It was a fairly quiet week in the markets until Friday, befitting the lack of economic data in the U.S. The market reacted on Friday after a deal for the latest payment to Greece was delayed by more austerity demands from European leaders. All trends for the week reversed on Friday.
The dollar and long-term U.S. Treasury bonds were the big losers until Friday. They fell Monday and Thursday. They surged on Friday, with long-term treasuries finishing the week with a 0.50% gain and the dollar ending with a modest loss.
I’ll be recommending a sale of our long-term treasury bond positions in the March issue of Retirement Watch, which will be posted to the web site late next week. You can make a sale in advance now if you want.
The losers for the week all were winners with gains of 0.50% to almost 2% through Thursday. They finished the week with modest losses. Emerging market stocks fared the worse, moving from a 1.5% weekly gain on Thursday to a 1% loss for the week on Friday. Energy-related commodities declined on Friday but then rose again to finish with a 0.75% gain. Broader industrial commodities lost about 0.50% for the week. U.S. stocks finished about even for the week. Gold had a wild week. It rose through Wednesday’s close to almost a 2% weekly gain, then declined to end up about even for the week.
Some Reading for You
Money market funds are about to change. You’ll earn lower yields and have less access to your cash. Read about it here.
There are four things you need to do to live longer and younger, according to an octogenarian doctor and researcher. Read his thoughts here.
“Play the Game You Want” is an essay about golf, but like most golf writing it also is about life. Golfer or not, spend some time reading this.
I comment on these items and more on my public at http://www.bobcarlson.net.
February 4, 2012 05:00 p.m.
Your Retirement Finance Week in Review
We had a very good investment webinar on Wednesday, discussing how to respond to the latest changes in global markets. You can review it and our previous webinars at www.tjtcapital.com. The webinars are gaining in popularity and attendance, so I’ll let you know when the next one is scheduled. I discuss these webinars in my role as managing members of Carlson Wealth Advisors, LLC.
The global economy now is in a growth phase thanks to central banks, and it is depending on central banks. Since the financial crisis began and the developed world undertook its deleveraging, fiscal and monetary policy have been the major drivers of economic activity. Each time that policymakers withdrew support, hoping that the economy had reached a sustainable level, economic activity declined. Growth resumed after stimulus resumed.
That pattern is clear in the recent data. Late in 2011 the Federal Reserve Board and the European Central Bank resumed stimulative policies. In mid-December, the ECB made clear it would pursue its own form of quantitative easing and do so essentially without limits. The “hawks” on the Fed lost their voting status at the end of 2011 and were replaced by more dovish members. The Fed lost no time in early 2012 indicating that supporting the economy and asset prices, especially stock prices were its priority.
We can see this monetary support and stimulus making its way through the global economy in the recent economic data. We look at the U.S. data below. Before we get to that, consider the global purchasing managers’ surveys that were released Wednesday. The reports indicated slowing last year but show modest growth since late in the year. The production growth is broad-based globally but it is modest. The exception is Japan, which hasn’t recovered from last year’s earthquake and remains mired in a depression.
But don’t get too excited about the recent data. It’s clear the global economy needs substantial government and central bank support. We aren’t going to get much fiscal support any more, because most governments either can’t afford it or face resistance from their citizens. Central banks are supporting the global economy, and their massive efforts are fighting against the general deleveraging. The result is likely to be modest economic growth with a lot of volatility in the economy and markets. If and when the central banks decide to make their policies less expansionary, the global economy is likely to sag again.
The Data
Friday’s economic data were the highlight of the week and major market movers. It helped that all the data issued Friday were almost-uniformly positive.
The monthly employment report is the big daddy of economic reports these days. I don’t understand why investors react so strongly to this report. It’s an estimate and often is revised considerably in following months. Employment also is a lagging indicator, not a leader. There are other issues, but the market responds to the report for several days.
The January employment report was very positive. Job growth greatly exceeded expectations and last month with a 243,000 net. Private payrolls increase by 257,000. The unemployment rate dropped from 8.5% to 8.3%. It continues several months of positive employment reports. According to the household survey, there were 491,000 jobs created. The two previous months’ jobs created also were revised upward.
The only negatives in the report related to household income, showing that the large number of people still unemployed are holding down wages. The average workweek for all employees was unchanged, though the workweek for manufacturing rose by 0.3 hours and factory overtime increased. Average hourly earnings rose 0.2% for a 12-month increase of only 1.9%.
The ISM Manufacturing Index also was very positive, rising from 52.6 to 56.8. It was boosted by strong gains in new orders and in employment. Finally on Friday factory orders rose 1.1% — a nice gain but a little below expectations.
The employment report was preceded by a decline in new weekly unemployment claims that also came in lower than estimates and below the four-week moving average. The ADP employment report, on the other hand, came in below expectations and well below the prior month’s level.
The Institute for Supply Management survey was another sign of an improvement in growth from the lows of fall 2011. Almost aspects of the report were positive, with a rise in new orders promising for continued growth in coming months. The Chicago Purchasing Managers Index the day before actually declined but still came in at a level that indicates more growth. Taken together, the surveys support the idea that modest economic growth will continue for several months.
Monday’s personal income and spending report showed that, contrary to recent months, household spending fell while income rose modestly. In addition, income growth is very modest. While retail spending grew in recent months because of reduced savings and increased credit card use, that can’t continue for long. High unemployment keeps a lid on wages, and that’s going to keep a lid on spending going forward. We saw further indication of low wage growth in Tuesday’s employment cost report.
Consumer confidence reversed a recent trend by falling in the latest report. Higher gas prices and the weak employment market contributed, plus consumer reported that they expect their income power to decline in coming months. The State Street Investor Confidence Index also declined, through the Bloomberg Consumer Comfort Index rose modestly.
The Case-Shiller home price index provided more bad news for homeowners, reporting another monthly price decline in most regions of the country. Prices are down 3.7% over 12 months. The index has declined seen months in a row and all but one month since May 2010.
The Markets
After the week’s positive economic data I recommend selling
