February 2014
February 28, 2014 04:15 p.m.
Your Retirement Finance Week in Review
New Fed Chairman Janet Yellen this week said things a number of investors apparently wanted to hear. Her words shouldn’t have surprised or made a difference to anyone who pays attention, but they apparently did.
Yellen said that it is too early to tell if the recent weaker-than-expected economic data was due to the weather or other factors. More importantly, she also said the Fed might halt or reduce its planned reductions in asset buying if the weakness persists. That is consistent with what both she and Ben Bernanke said in the past, but a number of investors liked hearing it.
The Data
There was a lot of data released this week. Most of it concerned housing and manufacturing.
But the main headline report was the second estimate of GDP for the fourth quarter of 2013. It was revised down from the initial 3.2% estimate to 2.4%. That was consistent with economists’ estimates and, couples with Janet Yellin’s testimony, gave fans of quantitative easing optimism that the Fed might not reduce asset purchases as much as planned. Third quarter growth was 4.1%, and the first quarter of 2014 most likely is slower than the fourth quarter of 2014.
The housing data generally supported the assessment we developed recently. The housing market is slowing, but that should be expected. The 2013 increase in home prices was around record levels. Plus, interest rates are rising and stimulus is receding. All indications are that housing will continue to make positive contributions to the economy, but a smaller contribution than it made in 2013.
The Case-Shiller and FHFA Home Price reports both were released on Tuesday. Both showed a 0.8% gain for December, but Case-Shiller recorded a 13.4% 12-month gain while FHFA’s 12-month gain was 7.7%. The December increases are lower than in recent months.
New home sales perked up investors. They came in well above expectations in the last month, for a 9.6% increase over the month. December’s number also was revised higher. Buyers appear to be shifting from existing homes to new homes as the great bargains in existing homes from distressed sales and foreclosures are less available. The Pending Home Sales Index showed a slight gain, which is the first since May. The December number also was revised higher.
Manufacturing reports were mixed, though most reports were above expectations. Analysts generally expected the bad winter weather to dampen activity more than it apparently did.
Texas manufacturing activity increased for the tenth consecutive month, according to the Dallas Fed Manufacturing Survey. The report generally was positive and pointed to higher growth in coming months.
The Richmond Fed Manufacturing Index, on the other hand, declined, and the weakness was evident in all elements of the report. The Kansas City Fed Manufacturing Index showed slightly positive growth in February. So far in the Fed surveys for the month we have a very weak report from Philadelphia and a modestly weak report from Richmond. The New York report was flat, and the Dallas report was positive.
Durable Goods Orders also were down, but not as much as last month or expectations. When transportation is dropped out, the results are positive, and the new orders component of the report was positive.
The Chicago Purchasing Managers Index showed no weather effects. It rose above last month’s number and well above expectations, which indicated a decline.
Consumer outlooks are holding up despite the disappointing economic data of recent weeks. Consumer Confidence as measured by the Conference Board declined a little and was below expectations. But the “present situation” component of the index rose sharply and is at its highest level since April 2008. Consumer Sentiment, as measured by the University of Michigan, rose slightly and was above expectations.
New unemployment claims rose and were a little higher than expectations. That indicates the labor market will continue its slow, steady road back to normal levels.
The Markets
Stocks have been recovering from their early year gains and finally made up the ground. On Thursday the S&P 500 hit a new record high, breaking the record set on Jan. 15 and wiping out the 5.8% decline incurred after that. The Russell 2000 Index of smaller U.S. companies also closed at a record high. Despite and up and down Friday, stocks generally closed higher on Friday and both indexes set new records. The Russell 2000 was up just under 1% for the week. The Dow 30 still is a bit below the record it hit on Dec. 31 and was up about 0.5% for the week. The S&P 500 and All-Country World Index both closed with gains of about 0.3%. Emerging market equities lagged with a loss of about 0.3%. They were down about 1.4% at midweek.
The dollar had a bad week, losing about 0.8%. Despite that long-term treasury bonds rose 1.8% to be the week’s best investment. Treasury Inflation-Protected Securities (TIPS) gained about 0.9%. Investment-grade bonds gained about 0.7%, and high-yield bonds rose only 0.5%.
Commodities didn’t have a good week. Broad-based commodities did best, gaining 0.2% on a Friday surge. Energy-based commodities lost 0.3%. Gold paused in its 2014 rally, losing 0.4% after being up almost 1% early in the week.
Some Reading for You
One of the big news items for the week was the release of the Fed minutes from 2008. I had several blog posts on them, including this one that focuses on the flaws in the Fed’s economic models.
A Wall Street Journal report on the reasons for the management changes at PIMCO gained a lot of attention. I link to several items and make some comments here.
In this post I give some reasons why you should be careful about using research, even research published in academic journals.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
February 21, 2014 05:00 p.m.
Your Retirement Finance Week in Review
Investors registered some concern this week after reading the latest minutes from the Federal Open Market Committee meeting. Some of that concern is warranted.
The concerns were raised by a discussion in the minutes about how the Fed should signal its plans eventually to raise interest rates. That discussion itself shouldn’t raise concerns. The minutes indicate that most of the Fed isn’t on the verge of raising rates. Instead, they are recognizing that its past guidance is becoming obsolete, because the unemployment rate rapidly is approaching the 6.5% target. The Fed isn’t going to raise rates as soon as unemployment falls below 6.5%, but it will need to change what it says to the public.
What investors should be concerned about is the combination of slowing growth and the Fed’s commitment to steadily withdrawing stimulus and eventually raising rates. Most of the risks to the economy now are external. They include potential crises in Europe and the emerging economies. The main internal threat is a policy mistake by the Fed, similar to the tightening it engaged in in 1937. At that time the economy was steadily recovering from the first phase of the Depression. The Fed decided to preempt inflation by tightening policy, and the economy tumbled back into a depression.
Today’s Fed has consistently overestimated growth in its forecasts. The minutes indicate that most of the Fed policymakers believe the economy is on a secure, steady path to growth and they can steadily reduce their asset buying and then move on to raising rates.
Recent economic data, as I’ve been reporting, says something else. The economy is slowing down from the peak growth of late 2013. It could stabilize around 2% to 2.5% growth, but that’s not a sure thing. The economy still is fragile. I’d like to see more Fed members recognize this and especially acknowledge that their forecasts consistently overestimate future growth. The FOMC members also should more clearly acknowledge that inflation remains well below their target and that there are strong deflationary forces from Europe, the emerging economies, and elsewhere.
I’m not concerned about an imminent recession or bearish stock market, but I do see caution signs. You should own stocks, but not the maximum bullish allocation for your risk level. You also should establish points at which you’ll reduce the current allocation if prices resume a decline.
The Data
The economy continues to grow, but at a slower rate than in late 2013, according to this week’s modest amount of data. It’s not clear how much the growth reduction is due to the unexpected weather of the last few months.
Most of the week’s data were in housing and manufacturing and were negative to mixed.
Three housing reports were below expectations, but analysts were quick to blame that on weather that shut down portions of the country for much of January. The Housing Market Index from the National Association of Home Builders turned down and was well below expectations. The home builders have been very optimistic in recent months, and still remain fairly optimistic about future sales.
Housing starts, not surprisingly, declined sharply. The drop was so significant that the 12-month numbers show a slight decline in activity from a year ago. Existing home sales also declined sharply. In fact the decline was significant enough to record a 5.5% existing home sales decline from 12 months ago.
I see the housing data as a moderation in the growth of 2012 and 2013. Those rates weren’t likely to be maintained. Also, home builders and sellers took advantage of the recovery to increase prices. For existing homes, the median price now is more than 10% higher than a year ago. Until recently, investors making primarily all-cash purchases were a significant percentage of buyers, especially in the hardest-hit areas. Their interest is diminished with the higher prices. Combine the higher prices with higher interest rates, and sales growth naturally decline. Real estate pros also report a shortage of inventory for sale.
Fundamentals favor continued decent growth in housing as long as the economy maintains its slow, steady improvement, but not the same rate of growth we saw in 2013.
Manufacturing data was all over the map this week. The most positive report was the PMI Manufacturing Index Flash which indicated that for the first half of February manufacturing activity increased sharply, by its highest monthly amount since May 2010.
The Empire State Manufacturing Survey was in the middle ground. The number was considerably below last month and expectations, but it still indicated modest, positive growth. Rounding out the week’s report, the Philadelphia Fed Survey was decidedly negative. This report was negative, the first negative reading since last May. The new orders component was especially negative. The report did cite comments from survey respondents that much of the decline was due to weather interrupting their operations.
The week’s inflation reports again show low inflation for both Producer Prices and Consumer Prices. The Department of Labor revised the PPI to include both services and construction. Even so, it didn’t change the final data much. This month’s change was in line with expectations and the 12-month rate is only 1.2%. Consumer Prices also were reported in line with estimates and brought the 12-month price increase to only 1.6%.
New unemployment claims were little changed and continue to indicate a slowly-improving labor market.
The Leading Indicators as reported by the Conference Board rose higher than expectations at 0.3%. This index is influenced by financial factors such as the bond yield spread. This positive was strong enough to override some negative factors such as an increase in unemployment claims and a slight reduction in the factory work week.
The Markets
Returns of stock market indexes were widely-dispersed again this week. All the U.S. indexes gave up some ground on Friday. The leader was the Russell 2000 Index of smaller U.S. companies. It rose about 1%. Bringing up is the Dow 30, which lost about 0.8%. Emerging market equities edged out the Dow 30 with a 0.4% loss. Breaking even for the week were the All-Country World Index and S&P 500.
Bonds also had widely-varying returns. Long-term treasury bonds and Treasury Inflation-Protected Securities (TIPS) had a bad week. The long bonds declined about 0.1%, though they were down close to 1% at midweek, while the TIPS lost about 0.2%. Investment-grade bonds managed a gain of about 0.1%. High-yield bonds again followed stocks more than bonds, returning about 0.3%.
The dollar rose almost 0.2% for the week.
Commodities had a positive weak. Energy-based commodities did best with a gain of about 1.6%, though they were up about 2.2% on Thursday’s close. Broader-based commodities gained just over 1%. Gold was down early in the week but rallied late in the week to close with a 0.8% gain.
Some Reading for You
Here’s a new candidate for the best stock market indicator.
The FTC is warning about a new e-mail scam involving funeral announcements.
Ray Dalio of Bridgewater Associates has his best insights summarized in this article.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
February 14, 2014 04:45 p.m.
Your Retirement Finance Week in Review
There wasn’t a lot of economic data release this week, so let’s look at some big picture stuff. It’s important to put the recent economic data in context of a longer-term picture. The economy clearly is slowing from the relatively rapid pace of the last part of 2013. But that slowdown was or should have been expected. The late-2013 growth rate exceeded the average since the financial crisis. It also was aided by sharp increases in stocks and home prices along with a high level of Federal Reserve stimulus. Those three factors were all set to be lower for 2014.
Most of the recent economic reports were both below expectations and weaker than the previous data. But they still generally show the economy is growing at a level consistent with the average growth since the 2009 bottom. Barring a new crisis event, which could be triggered from a range of global sources, the U.S. economy should chug along at 2% to 2.5% growth through 2014.
For example, take a look at the recent employment reports. The headline-grabbing monthly Employment Situation reports of the last two months disappointed analysts by significant margins. New job growth was much less than expected.
But these monthly reports always have been problematic. Their collection methods are weak, and the reports frequently are revised by significant margins. Also, when we look at other job market-related data, it is much more robust and consistent with 2013’s growth levels than the Employment Situation reports. Consider the ADP Employment report, weekly new unemployment claims, the employment information in the monthly ISM surveys and the Conference Board Consumer Confidence survey. The National Federal of Independent Business reports in recent months (the latest was issued this week) also show more plans to hire employees.
It’s also good to refer to the confidence surveys conducted of both consumers and businesses. Both types of surveys remain near high levels, indicating both households and businesses are generally comfortable with their situations and what they see happening around them.
I’m not sounding an all-clear. Sharp downturns in emerging economies and Europe could drag down the U.S. But for now, the slowing in the U.S. appears to be rational and expected. The most likely outcome going forward is that growth stabilizes around current levels and the U.S. economy slowly improves in 2014.
The Data
Before looking at the U.S. data, we’ll consider some data from Europe. Growth increased and was above expectations in key European countries, especially Germany, France, and the Netherlands. Even Italy eked out positive growth in the fourth quarter of 2013. Investors viewed the news very positively and pushed stocks higher on the news.
Retail sales were the major report of the weak and were well below expectations. Month-to-month, retail sales actually declined by 0.4%. The extent of this decline probably is exaggerated by the extreme weather in much of the country this winter. I know our telephone and mail activity slowed during the extreme weather events. Also, a major part of the decline was lower auto sales and are more likely to be affected by weather. These tend to be volatile. Excluding autos, retail sales were flat.
Industrial Production declined for the month, and manufacturing led the decline. No doubt weather had some effect on the data, but it also is a sign of slower growth. The problems in the emerging economies probably influence this data as well, since slower growth in those economies results in lower exports of U.S. goods.
There was positive news this week.
The NFIB Small Business Optimism Index rose again after a sharp increase last month. Sales expectations increased as did plans to hire more employees. Small businesses have lagged in the economic recovery and are finally closing the gap with the larger companies that had strong recoveries earlier in the post-crisis period.
The JOLTS (Job Openings and Labor Turnover Survey) is a detailed survey of the employment market. Almost all the factors in the survey were flat for the latest month (December). But the annual numbers indicate a slow, steady improvement in jobs. More people are voluntarily leaving jobs, a sign of confidence that they can locate new jobs, and there’s been persistent, modest improvements in the number of jobs available.
Consumer sentiment as measured by the University of Michigan held steady, but consumer expectations rose. These surveys indicate that households perceive things are better than the latest data indicate.
The Markets
It was an up-and-down week for equity markets, but they finished with two strong days. Two weeks of good returns make it start to look like the correction is over or at least taking a break.
Emerging market equities led the way with almost a 3.5% gain. They also had a good gain last week. Even so, they still are down 5% for 2014 while the S&P 500 has almost worked back to even for the year.
U.S. smaller companies as measured by the Russell 2000 Index are close behind with a gain of just over 3%. The other major market indexes I track each week are clustered around 2.5%: Dow 30, S&P 500, and All-Country World Index.
Bonds and the dollar didn’t fare as well. The dollar had a very bad week, losing 0.7%, with all of that on Thursday and Friday.
High-yield bonds as usual followed stocks more than bonds and gained 0.5%. Investment-grade bonds eked out a 0.2% gain. But long-term treasury bonds lost 0.2% and Treasury Inflation-Protected Securities (TIPS) lost 0.3%.
Commodities had a good week. Gold led the way with almost a 3.5% gain. The yellow metal now is over $1300 per ounce again after some recent forecasts that it would fall to around $1,000. Broader-based commodities gained about 1.6%, while energy-based commodities gained just over 1%.
Some Reading for You
Here’s an article related to Valentine’s Day.
Laszlo Birinyi forecast that the S&P 500 will reach 1900 next quarter.
Here’s what is scheduled to happen to those of you in Medicare Advantage plans.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
February 7, 2014 04:30 p.m.
Your Retirement Finance Week in Review
A few of our funds triggered sell signals before the markets rebounded this week.
In the Invest with the Winners, the entire model portfolio was invested in IShares Dow Jones U.S. Brokers (ticker: IAI). That ETF closed more than 7% below its recent high, so it should be sold and the proceeds put in cash until I compile the data for the next issue (which will be published on the web site next week).
In the other portfolios, Tweedy, Browne Global Value closed below its sell signal last Friday. In the next issue I’m going to recommend putting the sale proceeds in Cohen & Steers Realty Shares. You can do that now. In the Retirement Paycheck portfolio, Cohen & Steers Closed-End Opportunities also closed below its sell below price. I’m going to recommend those proceeds be put in Cohen & Steers Preferred Income Securities fund.
It’s too soon to relax and conclude that the correction in major stock indexes is over, but the last couple of days of the week were very positive. While the U.S. economy appears to have slowed a bit, the main risks to it and the stock markets lie outside the U.S. Continued deterioration in Europe and the emerging economies is as likely as not, and that could leak into the U.S. I’m not recommending sales of any investments in anticipation of such an event. I think stocks still are in a bull market (within a long-term bear market), and the economy still is growing. We should ride those trends while they last but be aware that they could be starting to reverse.
The Data
There was a fair amount of market-moving data this week. Early in the week it moved stocks down, and late in the week it drove stocks to gains.
Let’s start with the big headline report, the Employment Situation reports. This was a conflicting report and probably wasn’t affected by extreme weather in much of the country. The unemployment rate declined a fraction to 6.6%. Surprisingly, the workforce increased by over 500,000 after dropping in recent months. The number of jobs increased by 113,000. That was less than expected but better than last month.
More important to me are hours worked and average hourly earnings. These have been stagnant for months. I don’t think household demand can increase without increases in these factors. Hours worked remained steady at 34.4 per week, but hourly earnings increased by 0.2% after no change last month.
It’s hard to read much into this report since it might have been affected by recent unusual weather, and I don’t put much weight on these reports. I expect the economy to be a bit weaker in 2014 than it was at the end of 2013, and these reports indicate that’s the case.
Two employment reports issued earlier in the week were more optimistic. The ADP Employment Report said 175,000 jobs were created. This was a bit above expectations and another strong month. Also, new unemployment claims declined by 20,000 from the previous week.
The manufacturing reports for the week were mixed but still indicate growth. The big report was the ISM Manufacturing Index. It declined sharply from last month and was below expectations, but it still was above 50, indicating growth. It is the sharpest drop since 2011. The PMI Manufacturing Index, on the other hand, reported only a slight decline in activity. But both reports indicated declines in new orders, which of course is a warning sign for future growth.
Factory orders showed a real decline, not simply a decline in the growth rate. But when the volatile and distorting transportation sector is excluded, factory orders rose a modest 0.2%. Even so, durable goods orders within the report decline 4.2%.
Productivity is supposed to be declining, but that wasn’t the case in the latest quarterly report. Productivity rose 3.2% after rising 3.6% the previous quarter. The productivity increase helped reduce unit labor costs by 1.6%.
The Consumer Credit report indicated the holiday season was good for at least some retailers. Credit surged, including a large increase in revolving credit use. The revolving credit increase is the third largest monthly increase during the recovery.
The non-manufacturing part of the economy is doing well, according to the ISM Non-Manufacturing Index, which rose a full point.
Overall, the data indicate the economy still is growing but likely is growing at a slower rate than at the end of 2013. We have to be careful not to read too much into these reports, because weather might have affected several of them and delayed some activity to the spring months.
The Markets
The week started poorly for stocks, but most of the major indexes recovered for gains by the end of the week. The Russell 2000 U.S. Smaller Companies Index, however, didn’t recover enough to enter positive territory for the week. It was down over 3% at midweek and recovered only enough to claim about a 1% loss for the week. Emerging market stocks had the best week, returning just over 3%. The All-Country World Index was next with a 2% gain. The S&P 500 and Dow 30 both clocked about 1% returns.
The strength of international stocks was due partly to the dollar. It lost almost 1% for the week.
Bonds reversed course this week. Long-term treasuries lost almost 1%. Treasury Inflation-Protected Securities (TIPS) broke even. Investment-grade corporate bonds were just ahead with a gain of about 0.1%. High-yield bonds, which follow stocks more than bonds, did best with a gain of about 0.7%.
Commodities also had a good week. Gold lagged the others, gaining only 1.5%. Energy-based commodities surged on Friday to have return over 2% for the week. Broader-based commodities were just behind with a gain of 2%.
Some Reading for You
Here’s a good review of what’s wrong in the emerging markets.
John Makin of AEI describes what he believes are the conflicting forces Janet Yellin has to deal with as new chairman of the Fed.
Here’s some advice for those who wait for the right to time invest, the so-called “fat pitch.”
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
