January 2012
January 27, 2012 01:30 p.m.
Your Retirement Finance Week in Review
Central banks dominated the news this week with significant changes at the Federal Reserve. The Fed and the European Central Bank have had a stop-and-go money creation policy since the financial crisis accelerated in 2008. That appears to be in the past. This year three “hawks” on the Fed moved out of their voting status and were replaced by three members who are less worried about inflation and money creation. With those changes, the Fed announced it would extent its zero interest rate policy at least into 2014. That, coupled with an ECB announcement in mid-December, means there’s no limit to the money creation that will take place in the developed world. This has important implications for most investment assets, which I’ll develop in future issues of Retirement Watch and in my next free investment webinar on Feb. 1 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. Income and conservative investors are most affected by these policies. The Fed clearly wants to punish savers and force investors into riskier assets, especially stocks.
The big questions for the U.S. economy in the next few months are these: Can household spending continue to rise faster than incomes through reduced saving and higher credit card use? Can the U.S. avoid negative effects from Europe’s problems? Will China and the other emerging markets soon resume their high growth rates?
The Data
The major report for the week was Friday’s GDP report for the last quarter of 2011. After solid gains in employment data and retail sales, most analysts were expecting a big number of 3.0% or higher. They were disappointed with 2.8% growth for the fourth quarter. This is better than most quarters since 2008, but the other data led many to believe the economy was stronger. The number will be revised twice in coming months, so it could be revised upward to match expectations. The yearly growth of 1.6% also is below the recover peak of 3.0% recorded in 2010.
Negative features of the GDP report were lower government spending by 4.6%, and a sharp reduction in nonresidential fixed investment. Strengths in the report were an increase in inventories and a small increase in personal consumption expenditures of 2%. Many analysts were expecting higher PCE growth.
The Conference Board overhauled its Index of Leading Economic Indicators. Major changes were replacing the money supply with a credit measure and removing deliveries in favor of the ISM new orders index. The new LEI revised sharply downward gains of the previous two months under the old index and a gain of 0.4% for December. Investors will have to study and gain some experienced with the new LEI before it moves markets.
New jobless claims rose to 377,000. That’s above expectations and above last week’s number. But it is right on the four-week moving average. This continues to show a modest improvement in the labor market over the last year but not enough to substantially reduce the number of unemployed.
The industrial production report was consistent with data over the last few months showing that manufacturing is the strongest part of the U.S. economy and was strong in the last quarter of 2011.
The housing data for the week was mixed and continues to show a market bouncing along the bottom. New home sales were disappointing as was another decline in the sale price of new homes. This isn’t consistent with the homebuilders index that shows a lot of new activity. The pending home sales index was down after two months of strong gains but is up 5.6% for the year. The bottom line in housing is that very low mortgage interest rates still aren’t tempting a lot of people into either purchasing homes or refinancing mortgages.
Finally, consumer sentiment as measured by the Reuters/University of Michigan index increased modestly. The important expectations index had a gain of 5.5 points.
The Markets
The markets shot up on Wednesday with the Fed’s announcement. They couldn’t carry through on Thursday, however, and generally changed course on Friday with the disappointing GDP news.
Long-term treasury bonds are below the peaks they reached in mid-December and again in mid-January after losing about 4% last week. But they turned in a 1.5% gain for the week. Commodities had an interesting week. Gold fell early in the week but shot up on the Fed’s announcement on Wednesday, making it the high returner for the week with a return over 3%. Diversified industrial commodities rose steadily all week on good economic news before declining a little on Thursday for a 2.5% return or the week. The Goldman Sachs commodity index, which is largely composed of energy, didn’t far as well. It rose just under 1%.
Emerging market stocks are the high returner over two weeks, but that is based on strong returns of over 6% last week. This week they gained just over 1% over being up over 2% on Wednesday’s close.
The dollar was the major loser for the week, but lost only about 0.5%. The S&P 500 was up over 1% on Wednesday’s close but lost that and more the rest of the week. It finished with almost a 0.5% loss for the week. Corporate bonds had a good week. Investment trade bonds rose 1.5%, and high yield bonds rose over 1%. But high yields were up almost 1.75% on Wednesday’s close and gave up a lot of Wednesday’s increase.
It appears that most of the risky assets are overbought and overextended after a strong run from the September 2011 lows. In addition, the earnings season so far has been worse than other recent seasons, and the recent economic data has had more negative surprises than positive surprises. I think it’s likely investors have been too optimistic about the economy recently, and the stock and commodity markets will retreat some.
Some Reading for You
As I said above the Fed basically has declared all-out war on savers. You can read some details and other opinions about that here.
John Makin of the American Enterprise Institute gives a good review of why interest rates remained low in the U.S. despite widespread expectations that they would rise in 2011.
If you want to prepare for an economic collapse or just want to read about those who are, check out this story from Reuters.
I comment on these items and more on my public http://www.bobcarlson.net.
January 20, 2012 06:00 p.m.
Your Retirement Finance Week in Review
The “good news” from Europe that excited investors this week is that Greece is close to a deal with its bondholders. That’s good news because Greece won’t receive its next bailout payment until it reaches a deal with bondholders. But the deal is that the bondholders must agree to a haircut on their holdings.
Investors also seem to believe the corporate earnings season has been positive. But Barron’s has a different take on this. Historically about 72% of S&P 500 companies beat the analyst earnings estimates. (That might tell you something about analysts or companies or both.) So far in this earnings season only 62% are beating the estimates. Digging into the financial sector also provides an interesting picture. Investors reacted generally bullishly to some mediocre reports from financial companies this week. They also point out that the earnings growth for the financial sector was 65.4% so far. But much of that is due to AIG. The giant insurer had a big loss last quarter because it increased loss reserves. This quarter it will register modest positive earnings. Exclude the unusual action at AIG and the earnings growth rate for the financial sector declines from 65.4% to a negative 2.2%. And for the S&P 500 the picture changes from 9.5% earnings growth to 2.2% growth.
Despite the recent price rise and trading near the July 2011 levels, the S&P 500 is selling at a good price. It’s trading at a 12.3 P/E ratio based on forward earnings estimates, compared to an average of 14.7 for the last decade. But forward earnings estimates are notoriously unreliable, especially during a quarter when fewer companies are beating the estimates.
The Data
It was another fairly light week for economic data, with most of the data supporting the arguments of optimists.
The inflation data continued to be benign, even leaning toward the deflationary. The Consumer Price Index was unchanged in December. Excluding food and energy it rose only 0.1%. The headline number was below expectations, and the less food and energy number was slightly above expectation. The producer price index actually was negative for December and up 4.8% for the last 12 months. The inflation data continue to indicate that inflation peaked sometime in 2011 and is slowly declining.
There was generally good housing news, supporting my view that the housing market generally is bumping along the bottom. Existing homes sales rose 5% for the month, exceeding expectations. Though home prices have been declining for six months, they rose a bit in December. Despite low interest rates and low home prices, home sales are near historic lows and one third of all contracts end in failure. Housing starts and permits both rose but were below expectations. But the decline was due to a sharp decline in the volatile multifamily (apartment) sector. Single family home starts rose 4.4%. New mortgage applications are growing modestly as interest rates fall, but are well below boom period peaks. A high percentage of home sales that close are cash deals.
The Empire State Manufacturing Survey had a second consecutive strong month. But that only returns it to where it was in the first half of 2011. Importantly, new orders and employment were positive. This indicates strength in manufacturing that will continue for at least a few more months. The Philadelphia Fed survey also was positive, but it fell below expectations and the previous month’s number. Industrial Production also had a good month, recovering from the previous month’s decline. Within this index, manufacturing was by far the strongest sector. Industrial capacity use rose to 78.1%, which was the expectation. In sum, it looks like manufacturing, which is a relatively small part of the U.S. economy, is doing well.
Jobless claims fell sharply by 50,000, following the previous week’s strong rose. New job claims are volatile, so most analysts use the four-week moving average. This is at 379,000, comfortably below the recession-indicating 400,000 level but not close enough to the job-creating 250,000 level. The employment data continue to indicate that employers no longer are laying people off in significant numbers but are not hiring people fast enough to bring employment near peak levels.
The Markets
Markets finally started to diverse this week after being highly correlated for a while. The week’s big winners was emerging market stocks, rising about 5.5% by week’s end. U.S. stocks were farther behind, rising a little over 2%. This to some extent is closing the wide gap from 2011 when U.S. stocks handily outperformed international stocks, especially emerging markets. Interesting, international inflation-protected bonds matched the S&P 500 for the week.
The week’s big losers were the winners of the previous weeks. Long-term treasury bonds lost over 3% for the week with most of that coming on Thursday and Friday. The U.S. dollar also lost about 1.5%. During the week investors became more complacent about the European situation and stopped their recent flight to safety.
U.S. inflation-protected bonds did better than straight treasuries, rising a little under 1% for the week. Gold had a good week, rising almost 2%. High-yield bonds rose a little under 1%. Coming in about even for the week were diversified industrial commodities and investment grade corporate bonds.
Investors are putting the best face on corporate earnings season and on news from Europe. U.S. stocks are at six-month eyes, and investors are becoming bullish. We’ll see how the markets handle the next bit of bad news and if U.S. consumers continue the spending surge of the last part of 2011.
Some Reading for You
Lacy Hunt and Van Hoisington of Hoisington Capital Management are out with their latest quarterly commentary. I always encourage you to read it. This quarter they remain bearish on the economy and bullish on long-term treasury bonds.
The bankruptcy filing of Kodak was big news this week. I always like to look behind the headlines for what I think is the real story. I think Larry Keeley has done that in Fortune.
Finally there’s a good book out on the causes of the financial crisis. You can read a review of it here.
I comment on these items and more on my public at http://www.bobcarlson.net.
January 14, 2012 04:00 p.m.
Your Retirement Finance Week in Review
The uncertainty, confusion, and volatility of 2011 carries forward into early 2012. There wasn’t much economic data released in the U.S. this week. Most of the releases for the week were negative surprises. News from Europe continue to dominate the attention of investors, though they don’t always respond the way one anticipated.
The major issue for U.S. investors is whether the U.S. economy can continue to remain delinked from Europe and the emerging economies. Europe like is in a recession and it could become a serious one. Most of its banks now are zombies. They can’t lend money, because they need to bolster their balance sheets. They’re laying off employees, selling assets, and depositing the funds they have with the European Central Bank for safekeeping. The good news from Europe this week was that Spain had strong sales for its latest bond issue. I’m especially curious about the major bond refinancing that Spain and Italy will have to do in April.
Economic growth is slower in Asia, especially China, and the question is whether the countries will slow growth enough to contain inflation without tipping their economies into recessions (which some analysts define as growth of 5% or less in China).
Let’s move on to the data and the markets.
The Data
Both new unemployment claims and retail sales (as measured by the Census Bureau) were disappointing. After several months of steady decline, new jobless claims shot up to 399,000. It’s might be an indication that most of the gains in December employment report were temporary holiday hires in retail and delivery. Or it could be part of the usual volatility in this number. We’ll have to wait several weeks to see.
Retail sales (also as measured by the Census monthly) barely increased while most analysts were expecting a 0.4% monthly increase for December. Exclude autos and retail sales actually declined. Exclude autos and gasoline and sales were flat. This contradicts reports of strong holiday sales from many retailers. It could be consumers front-loaded their buying in November. It’s also possible the number is wrong. The October and November numbers were revised upward in the same report, so that could happen to December’s numbers next month.
Business inventories came in right about at expectations. There wasn’t much change in inventories during the quarter, and that means inventory changes won’t influence the GDP data for the fourth quarter when it’s announced.
The only other meaningful data was the University of Michigan Consumer Sentiment Index. It rose well above expectations and has risen sharply since August’s lows. Yet, it’s still below the year ago level and well below pre-crisis highs. While it’s positive that sentiment is improving, it’s rising from a very low level. That makes it risky to say consumers are feeling good and are likely to continue spending.
The conundrum that will be worked out in coming months is whether retail sales can continue rising while employment and household incomes are fairly stagnant. Consumers have been reducing spending and using credit cards to take advantage of holiday sales. Was that a temporary move or part of a sustained trend?
We’re also likely to see more news outside the markets influencing investments in the near future. Things are heating up with Iran, and it looks like some stronger sanctions and perhaps even a blockade are in the works.
The Markets
The high correlations in most assets continues. It looks like the winner for the week will be long-term treasury bonds. They generally had a good week but soared on Friday after rumors of the credit downgrade of several European government bonds by S&P hit the headlines. That’s a bit odd, since the bonds of the governments didn’t move much and traders were arguing that the downgrades already were in market prices. If so, why did treasury prices rise? Close behind treasuries are emerging market stocks as measured by the ETF with the ticker EEM. That’s inconsistent with traditional patterns in which the two go in opposite directions, but the EEM is down by about 1% from its Thursday high.
Industrial commodities had a bad week. They were the only assets to lose value for the week. This occurred despite increases in oil. I take this as a sign that global economies still are week and commodity investors expect demand to continue to weaken because of low economic growth.
U.S. stocks have a small gain for the week but had close to a 1.5% gain at Thursday’s high and also at Monday’s close. Gold also had a volatile week. It rose to a 2.5% gain for the week at Wednesday’s close but finished the week with only about a 1.5% gain.
High-yield corporate bonds ended flat for the week after trading in a narrow range. Investment grade bonds gained over 0.5%. The dollar was down 0.5% for the week twice but finished about 0.5% up for the week.
In short, long-term treasury bonds were the place to be in a week of uncertainty and potential crisis. The risky and volatile emerging market stocks also did well for the week but that was mostly a carry through from a big return on Monday. Similarly though treasuries did well for the week, they have about a 0% gain for two weeks.
Some Reading for You
I always recommend you ready John Makin’s essays when he posts a new one. The essay posted this week was almost optimistic, compared with those over the last year or so.
While you’re at it, take a look at Bill Gross’s latest piece, which isn’t anywhere near optimistic.
Don’t reach for yields by purchasing mortgage REITs, says Jeff Gundlach of DoubleLine funds. There’s too much risk for the yield.
Finally, you might be interested in this review of research on the relationship between happiness and money.
I comment on these items and more on my public at http://www.bobcarlson.net.
January 7, 2012 03:00 p.m.
Your Retirement Finance Week in Review
Happy New Year to all of you. I promise to make it another year when your financial security increases and we get you closer to the retirement you desire.
Is it like 2006 again? Back then the economy and stock markets seemed to be sailing smoothly and were in what was called the virtuous cycle. That’s when I became cautious about the economy and equity markets. The growth didn’t seem sustainable, especially in the housing market. The major concern was that people were taking on too much debt and spending far more than they were earning. You know what happened over the next couple of years.
We’re not in such an extreme position today, but there are tensions that make me question the sustainability of the recent positive data. Of course, there’s the drag from Europe and the slower growth in the emerging economies. But, as I’ve said before, the recent growth in the U.S. seems to be supported by household spending exceeding income. Let’s take a lot at what’s the data and the markets show.
The Data
The data were mixed the last couple of weeks with enough fodder to support any forecast. I want to focus on two key areas.
For some months I’ve questioned how retail sales can continue exceeding household income. It’s an important question. Much of the positive economic data results from higher household spending. Businesses will hire and increase salaries if they are convinced the spending will continue. But they won’t if the spending appears to be temporary.
That’s why stock markets declined on Jan. 4 and 5. Retailers reported lower profit expectations. It seems they boosted sales during the last quarter of 2011 by offering deep discounts that damaged profit margins. People were buying mainly because the prices were irresistible. They’re still frugal. They reduced savings to snap up some deals, but they could easily cut back now.
That’s the bad news.
The good news is in the recent employment reports. New unemployment claims continue to decline. They’re still high by historic norms, but they’re well down from the crisis peaks and inching they’re way down to an acceptable 250,000 levels.
The Jan. 6 employment report also was better than expected by showing 200,000 new jobs and an employment rate dropping to 8.5%. Private payrolls increased by 212,000 while government payrolls declined.
Perhaps even more important were the increases in average hourly earnings and hours worked. If these continue, they’ll point to increases in household income that can support higher spending and economic growth.
The employment report was not all positive. The unemployment rate declined primarily because people dropped out of the work force. Also, a lot of the jobs created appear to be temporary jobs in couriers and messengers and retail.
The markets did not respond positively to the employment data because of doubts about whether the new jobs were temporary as well as continuing concerns about the housing market and the European debt situation.
The Markets
Investment returns in 2011 were very different from what many expected at the beginning of the year. The consensus was that economic growth was sustainable and inflation and rising interest rates were potential problems. Instead, the end of many stimulus measures, continued deleveraging, and worsening of the European debt situation resulted in reduced economic growth, low inflation, and falling interest rates.
A traditional portfolio of 60% stocks and 40% bonds lost about 2% in 2011. This “balanced” portfolio is heavily dependent on stock market returns and rising economic growth. Stocks across the globe declined. The U.S. was the best-performing market with a 2% rise. A global equity index declined about 5.5%. Bonds did well, and long-term U.S. Treasury bonds did best benefitting from declining inflation and a flight to safety. Investment-grade and high-yield corporate bonds had mediocre years with returns around 5%. Industrial commodities did poorly, losing over 13%. Gold had a volatile year. It declined at the start, soared in the summer, and declined the last part of the year for a net 9.5% gain for the year. The dollar did well, and emerging market currencies did poorly, especially against the dollar.
When risk or volatility is factored in, the differences are more stark. Stock investors had to endure quite a roller coaster ride to achieve the modest return in U.S. stocks. Adjusted for risk, they lost money. Investment pros refer to this as measuring return for each unit of risk taken. Investors in stocks and commodities weren’t rewarded for the risks they took in 2011. Returns in treasury bonds and inflation-indexed bonds were very strong for the amount of risk taken.
In the last two weeks, most assets have been very volatile as investors try to sort out the conflicting data discussed earlier. But most of the activity was packed in the first trading day of 2012, January 2. Treasury bonds are flat for two weeks. They rose the first week, and then dropped sharply on Jan. 2. They’re flat for two weeks. Gold fell sharply the last week of December (triggering a sell signal in Tocqueville Gold on Dec. 28), surged, and then declined for a 2% return for two weeks.
U.S. stocks were the best-performer after gold with a return of about 1.5%. Emerging market stocks lagged, coming in with a 0% return for two weeks after a lot of volatility. The dollar did well, returning about 1.5%, and high yield bonds lost a small amount.
Some Reading for You
Build your own index annuity? I’ve explained ways to do this in past Retirement Watch visits. Here’s another explanation of how it can work.
There’s a lot more to retirement planning than financial planning. I try to emphasize that from time to time. Here’s another view of the importance of nonfinancial matters and what you can do about them.
There’s been a lot of discussion lately about what happens to a person’s debts are death. You can find a good summary of the issue here.
I comment on these items and more on my public at http://www.bobcarlson.net.
