January 2013
January 25, 2013 04:40 p.m.
Your Retirement Finance Week in Review
There were a few conflicts in the headlines that kept investors from moving strongly in either direction. The positive news was a decision by House Republicans to extend the debt ceiling for three months with no conditions other than a requirement that the Senate actually pass a budget this year if Senators want to be paid for the year. So, that took off the table the potential for another crisis and ratings downgrade similar to what happened in 2011.
Countering that was bad earnings news from Apple. This offset good earnings reports from other companies earlier in the week. The other good earnings reports also were offset by some of the economic reports described below.
Overall, there are signs that economic growth could pick up from its slow pace of the last few years and equal or exceed 3% for more than a quarter or two.
The Data
Let’s start with residential housing, which had only a few reports this week. Housing, as you know, has been one of the strong points of the economy over the last eight months or so. It’s been a positive contributor to economic growth and a source of optimism.
Many people were distressed early in the week when the existing home sales report came in and was reported as down and lower than expectations. The initial analyses were misleading. The number was only slightly down and below expectations, not enough to even note. More importantly were the details. For the last few years, most existing home sales were distressed sales and foreclosures. That kept prices down and also made it difficult for builders to sell new homes with so many distressed homes on the market. But the number of distressed sales is declining. That indicates a turning point in the market that should help both prices and new home sales. Also, inventory for sale is low, and that’s a factor that keeps sales down.
Home prices rose rose moderately, slightly below expectations, according to the FHFA House Price Index. It also registered 2012’s price increase at 5.6%, the highest level since 2006. New home sales were the final housing report for the week. They initially were viewed as negative, because the 369,000 number was well below the consensus. But the data for the previous months were revised considerably upward. The December sales also are likely to be revised higher in coming months. In 2012 there was a 19.9% increase in sales, and that was the first positive number since 2005. But the 2012 sales were well below the 1,000,000 peaks of the boom. Sales likely will increase in coming years to somewhere between 500,000 and 800,000, but it’s likely to be a slow, steady decline.
Manufacturing data continued to paint a mixed picture. The Federal Reserve regional banks generally indicated that manufacturing contracted a bit for January. The Richmond Fed’s reading was decidedly negative, with new orders being especially negative. The Kansas City Fed also was negative and below expectations, but not nearly as much as the Richmond Fed.
On the other hand, the PMI Manufacturing Flash Index for the first half of January was decidedly positive and above expectations. It shows a clear expansion in manufacturing. This continues a trend of the PMI data being more positive than regional Fed reports and some of the government data.
Two extremely positive reports for the week were new unemployment claims and leading indicators. New claims declined to a five-year low of 330,000, much better than consensus expectations. Some economists caution that unemployment claims tend to be unstable during January so we should wait before reading significance in the recent trend. The instability of unemployment claims led to a sharp jump in the Leading Economic Indicators from the Conference Board. But most measures in the index were positive, though not as positive as the recent improvement in new unemployment claims.
The Markets
This was an unusual week in the markets compared to the last few years. But it represents the kind behavior we saw before the market crisis. I take that as a sign that policymakers are taking more of a back seat and that we’re returning to something closer to normal markets.
Emerging market equities took a dive this week, but other stock markets did well. The Dow 30 led stock indexes and rose 2%. The Russell 2000 small U.S. company stock index rose about 1.75%, and the S&P 500 rose 1.5%. Global stocks, as measured by the All-Country World Index lagged with a rise of just over 1%. Emerging economy stocks declined steadily all week until recovering a bit on Friday. They finished with a loss of just over 1%. There were three causes of the emerging market stock decline. The disappointing earnings report from Apple raised fears that Apple products wouldn’t sell as strongly in coming quarters, and that would hurt the Asian supply chain companies of the company. Brazilian stocks declined on inflation concerns, while several prominent analysts warned about China.
Long-term treasuries had a volatile week, capped by a sharp decline on Friday to close with a loss of almost 1.5%. The likely cause was improving situations in both Europe and the U.S., reversing the long-term flight to safety. The dollar was doing well until it also declined on Friday, closing with a loss of over 0.25%. Investment-grade corporate bonds had the same loss. But high-yield bonds had a good week, gaining 0.25%.
It also was a wild and diverse week in commodities. Energy-based commodities had a good week, rising just under 1%. Gold started the week well but declined late in the week. Again, this likely was due to a reversal of the flight to safety, and resulted in a 2% loss for the week. Broader-based commodities declined steadily for a loss of just under 0.5%.
I say this week was like pre-crisis times, because correlations between different assets declined. Investments rose and fell on their own rather than rising or falling mostly together.
Some Reading for You
Ray Dalio of Bridgewater Associates gave a half hour presentation on CNBC this week. See the links and my commentary here.
PIMCO’s high-yield bond expert has a good essay on the factors that influence prices of high-yield bonds. Click here.
Federal Reserve officials were well behind the curve as the housing bubble developed and then popped. Proof is in the transcripts of their 2007 meetings.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
January 18, 2013 04:40 p.m.
Your Retirement Finance Week in Review
The dominating characteristic of the first weeks of 2013 is the high levels of consensus and complacency in the markets. One survey this week revealed that Wall Street economists and analysts don’t have the usual wide range of disagreement in their projects. Instead, projections for the major markets and economic factors fall into an unusually narrow range. Unlike the last few years, the professionals seem to agree both on current conditions and what’s likely to happen during the year.
One result of this is the low volatility in the markets, as represented by such indicators as the VIX. Another result is low levels of implied volatilities in options.
Unfortunately, history and economic theory say that consensus and stability are followed at some point by extreme moves. The greater the period of stability, the greater the ensuing volatility. Given the high number of uncertain factors and imbalances today, the consensus and complacency are surprising. History also indicates that when there’s a high level of agreement about the future, things turn out very differently. That’s why I’m recommending diversified and balanced portfolios to start the year.
The Data
The data issued during the week continued to paint a mixed picture of the economy. It’s growing but slowly and unevenly.
The mixed picture was apparent in the reports about households. Retail sales for December exceeded expectations and the prior month. After removing the volatile auto and gasoline sales, retail sales still were up a strong 0.6% and above expectations. But on Friday Consumer Sentiment was down from the previous month and below expectations. Measures of Consumer Sentiment and Optimism had been increasing for months. This was the second straight month of declines, and they were substantial declines, bringing the number down to late 2011 levels. The latest survey was taken after the resolution of the fiscal cliff. The betting was that previous declines were because of the uncertainty of the fiscal cliff resolution. This reading, coming after the resolution, puts that theory in doubt.
Manufacturing also was mixed. The industrial production report on Thursday was up less than the previous month but above expectations. The headline number was considered misleading because utility production was sharply down. The manufacturing component was up strongly. But both the Empire State Manufacturing Survey and the Philadelphia Fed Survey were sharply negative. Last month’s Philadelphia Fed Survey had a sharp increase after being flat to down most of 2012. That was a cause for some optimism but now appears to have been a one-time event.
One way to look at the manufacturing data is that the northeast is having problems but the rest of the country is doing well. The Empire State and Philadelphia Fed surveys tend to be negative outliers while most other manufacturing data is neutral to positive.
There were two housing reports for the week. The Housing Market Index issued by the homebuilders was the same as last month. That breaks a string of eight months of improvements. The reading of 47 still is below 50, and above 50 indicates more builders describe conditions as good than bad. But the northeast region is dragging down the overall index. It has a reading of 36 while the other three regions are 49 or higher. Housing starts in December soared above expectations after a drop in November.
New unemployment claims were a significant outlier during the week, declining to 335,000 and turning in the best reading of the recovery by a wide margin. A drop of 37,000 claims in one week is a big move, and many economists say it’s due to seasonal factors that make claims very volatile at this time of year.
Both the Consumer Price Index and Producer Price Index showed no inflation threat. The PPI actually registered deflation for the second straight month, though the core PPI excluding food and energy rose modestly by 0.1%. The CPI was flat, and the core was up 0.1%. Both were right on the expectations. That puts the year’s CPI below 2%.
The Markets
It was mostly a quiet week for the markets, except for some substantial moves on Thursday. Most assets have a positive week.
The week’s losers were long-term treasury bonds and investment-grade bonds. At one point Thursday, long-term treasuries were down 1%, but they recovered for a 0.25% loss. Investment-grade bonds had about the same loss. Treasury Inflation-Protected Securities (TIPS) and international TIPS finished the week about even. High-yield bonds were fairly stable, finishing the week with a gain of less than 0.5%.
Commodities had a strong week. Energy-based commodities and broader-based commodities tracked each other closely gained 1.5%. Gold was more volatile but was positive all week, finishing with a 1.25% gain. The dollar had a good week, gaining 0.5%.
It was a good week for equities across the globe, though the returns varied considerably. The leaders by far were U.S. small company stocks are measured by the Russell 2000 index. They rose almost 1.5%. Just behind were large company U.S. stocks. The S&P 500 and Dow 30 both scored 1% gains.
Stocks outside the U.S. didn’t do as well. Global stocks as measured by the All-Country World Index rose 0.75%, and emerging market stocks returned just over 0.5%. International and emerging market stocks were helped by good economic data from China reported Thursday evening eastern U.S. time.
Some Reading for You
Are Fed officials worrying more about the negative effects of quantitative easing? At least a few of them are, and one of the biggest worries is what happens in the markets once the Fed announced tighter money. Read here for more.
Changes are coming in money market funds despite the failure of a reform proposal late in 2012. The Washington Post reports.
Mark Cuban, the billionaire tech company founder and sports team owner, has some theories about the investment markets. I think he overstates some of the points, but it’s well worth reading.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
January 11, 2013 05:55 p.m.
Your Retirement Finance Week in Review
Thanks to all of you who participated in the latest webinar on Wednesday. We had record participation and very good feedback. For those of you who missed it, a replay soon will be available on the web site at www.tjtcapital.com. I discuss these webinars in my role as managing member of Carlson Wealth Advisors, LLC.
There are a couple of things that aren’t receiving much attention and will cause surprises in coming months.
People took action as the fiscal cliff approached at the end of 2012. Many people sold assets to ensure they were taxed at the maximum 15% tax rate instead of a new, higher rate (which turned out to be 20%). Also, a number of corporations issued special dividends late in the year so shareholders would pay the 15% rate instead of a higher rate.
One effect of these actions likely will be a surge in federal and state tax revenues as investors pay taxes on these sales and dividends. This will be a one-time surge. But it will reduce the deficit below expectations early in the year and perhaps roil the debates over the federal debt limit and budget.
Another effect is that cash balances are high. You can see that in the data for money market funds and bank deposits. The owners of this money aren’t likely to be content with a permanent allocation to cash. Most of this money is going to be invested in assets and probably fairly quickly. Whichever market or markets investors choose, the surge likely will roil those markets for a while. The risk is investors will view this as a new bull market and be surprised when price increases stall after the money is invested.
We need to keep the effect of these cash balances in mind as we analyze market movements in coming months.
The Data
This was a quiet week for data.
The only major report was on Consumer Credit. The headline number gave the appearance of a significant increase in consumer borrowing and spending. The $16 billion increase in consumer credit for November was above expectations and the prior month. It makes it appear that the deleveraging is steadily ending.
But a look at the report’s details aren’t as positive. The increase primarily was in student loans and auto sales. Student loans now are dominated by the federal government and are subsidized, so this doesn’t reflect real economic transactions. Auto sales are volatile. They were healthy in 2012 thanks to low interest rates and a need to replace aging vehicles.
But the main source of consumer credit historically is mortgage borrowing, which dwarfs other credit sources, and that remains weak. Credit card purchases rose for the holiday period, but they aren’t at a significant level and aren’t going to make up for the shortfall in mortgages. To some extent, households probably are using student loans to replace other types of debt, because they’re easy to get and carry low rates. And more credit card use can support higher retail sales. But the overall picture supports the idea of continued slow growth.
Small businesses still remain mired at low levels of activity. The National Federation of Independent Business’ Small Business Optimism Index rose a small amount for the month. The good news is that sales expectations rose a bit. Small businesses continue to worry about taxes, regulations, and low demand for their goods and services. Despite the rise, the index still is at typical recession levels.
New unemployment claims rose by 4,000 and were higher than expectations. After the distortions from Hurricane Sandy, claims seem to have settled around 360,000 per week. That doesn’t indicate much improvement in the labor market.
Mortgage applications rose sharply after several weeks of declines. The recent volatility could be a result of holiday distortions. It also is possible that some potential applicants came to believe that mortgage rates have hit their lows for this cycle and that they’d better lock in rates before they rise further.
That’s it for the significant data this week. It’s hard to draw conclusions from this small sample. There’s nothing in this data to indicate any change in the recent slowly-growing economy with low inflation.
The Markets
Most investment markets had a fairly stable week. Only a couple lost money for the week.
The dollar was the big loser, as measured by the basket of currencies of the seven main trading partners. The dollar lost about 1.25% for the week and ended at the week’s low. All of the decline occurred on Thursday and Friday and was due to a surge in the yen. The yen’s been falling against the dollar for some time, and this was partly a correction and partly a response to a new fiscal stimulus announced by Japan’s new prime minister. This is unlikely to continue, because Japan’s export-driven economy can’t afford a higher yen.
The other loser was emerging market equities. These had a volatile week, dropping 1% on Tuesday, rising back to a 0.5% gain for the week late Thursday, and dropping again on Friday. It ended the week with about a 0.25% loss for the week. Friday’s decline seems to be a response to a high inflation report from China that caused Chinese stock indexes to decline.
Other stock indexes had a better week. Global stocks, as measured by the All-Country World Index, rose over 1%. The S&P 500 and Dow were both up around 0.75% for the week. U.S. small company stocks as measured by the Russell 2000 were up about 0.50%.
Bonds had a good week. Long-term U.S. treasury bonds reversed some of their recent losses, gaining 1% for the week despite a tumble on Thursday. High-yield bonds gained just over 0.50%, and Treasury Inflation-Protected Securities (TIPS) gained 0.50%. Investment-grade corporate bonds also reversed some of their recent losses, gaining 0.25%.
Commodities finished the week with similar gains, despite divergences during the week. Energy-based commodities gained about 0.75% as did gold, but both were up almost 2% on Wednesday’s close and lost some ground late in the week. Broader-based commodities were down most of the week but recovered at the end for a 0.50% weekly gain.
Some Reading for You
China’s become an important driver of the global economy, so investors pay attention. Societe Generale put out an interesting report on how China might have a hard landing and what the effects would be.
What helps people live to 100 or beyond? Here’s a list of some surprising factor.
You don’t have to take higher risk to earn higher returns. Here’s a tribute to the late Robert Haugen, who popularized low volatility investing.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
January 4, 2013 05:20 p.m.
Your Retirement Finance Week in Review
Happy New Year.
All the spaces for my free online investment presentation “Managing Your Investments in 2013,” on Wednesday, January 9, 2013, are filled. I’m looking forward to it and thank those who’ve signed up. Those who are still interested should watch the TJT Capital web site for information about replays. I’ll let you know when our next online presentation is planned. I discuss these free investment webinars in my role as managing member of Carlson Wealth Advisors, L.L.C.
Remember, you always can forward these e-mails to anyone you think might be interested in reading them. You also can view more insights and news about your retirement finances on my public blog.
Now, let’s move on to this week’s discussion.
The first week of the holiday period was quiet, but this past week had two market-moving news events.
The agreement on the fiscal cliff apparently relieved a lot of investors’ anxiety or caused some panic buying. Coupled with the normal beginning of the year flood of cash into the markets, it pushed prices of risky assets higher. The other news was the release of the minutes from the Fed’s latest meeting. Investors in general interpreted the minutes as indicating that the Fed is likely to curtail its quantitative easing program and let interest rates rise sooner than expected. The minutes indicated that “several members” wanted to end the bond buying well before the end of 2013 while a “few” others are interested in ending the program after 2013. This is very different from the impression created by the official Fed announcements and Ben Bernanke’s press conferences.
The minutes seem to conflict with the official announcements after the meeting. Even so, the comments were important, because as we entered the new year it looked like the biggest risk that wasn’t priced into the markets was a change in Fed policy. Now, some people are saying that 2013 or 2014 could be a repeat of 1994, when the Fed unexpectedly increased interest rates overnight. That caused the worst bond market in some time and losses for many investors caught on the wrong side. Eventually Orange County, California filed for bankruptcy because of the consequences of the policy.
It’s another argument for continuing our Retirement Watch policy of avoiding specific forecasts about the future and investing in line with the forecasts. It’s better to consider different scenarios, be diversified, and have plans in place in case there is a surprise or change.
The Data
Manufacturing data continues to be mixed, indicating the decline of 2012 probably is over but growth is slow. The ISM Manufacturing Index had a slight increase to 50.7, and the reading over 50 indicates very slight growth. Factory orders were flat and below expectations. The PMI Manufacturing Index registered its strongest level since May but was below expectations and a little below the “flash” mid-month number. Reports from the Federal Reserve District banks also were mixed.
Housing continued to report good numbers, with growth in new home and existing home sales. The Case-Shiller Home Price Index showed continuing price increases, and the first full-year price increase since the market peak. On the negative side, mortgage applications are down again despite low interest rates.
Consumer confidence declined, which is attributed to the prospect of the fiscal cliff and uncertainty surrounding it. This is reflected in chain store retail sales, which continue to be mixed. Some stores report good growth, while others are lagging and giving pessimistic forecasts for 2013.
The ISM Non-Manufacturing Index showed strong growth. It’s at its highest level since early 2012 but still is below the peak of early 2011. If the trend continues, it indicates the non-manufacturing sector of the economy is doing well.
The employment situation report was the big one of the last two weeks, and it didn’t reveal much. The number of jobs created, 155,000, was right on expectations and with the average for 2012. But it’s still well below what’s needed to reduce the unemployment rate. In fact, the rate increased because more people joined the work force. On the positive side, hourly earnings and the average workweek increased, but only by small amounts.
The data boil down to continue slow growth in the U.S. Housing should continue to do well and contribute modestly to positive growth. Consumer spending should continue at recent modest growth rates, though it could increase more if consumers continue to reduce savings rates or borrow against home equity. Business spending and investment is likely to increase above recent weak levels, but is unlikely to return to the strong levels of 2010 and 2011.
Offsetting these positive factors are some negative trends. In 2009 and 2010, U.S. companies benefited from strong international sales. Growth in emerging markets is slower now, and economies are declining in Europe and Japan. So, international factors are likely to be somewhere between a drag and a modest benefit. The U.S. government is reducing its support to the private sector by reducing spending and increasing taxes. That will be a growth headwind.
The wild card is the impact from energy. Low oil prices and the boom in natural gas drilling in the U.S. will be positive. The amount this adds to GDP is uncertain but definitely will be positive.
The Markets
The investments most affected by the news events were emerging market stocks and long-term treasury bonds. They went in the opposite directions.
Long-term treasury bonds were shellacked. First, some investors sold their safety assets after the fiscal cliff deal, believing some uncertainty was resolved. They had a 1% gain at the end of last week but closed this week with a loss of about 3% for the two weeks.
Emerging market stocks and other equities did well mostly in response to the fiscal cliff deal and the beginning of the year cash flood. They lost some of their gains after the Fed minutes were released. The emerging market equities were up about 5% for the two weeks before the Fed minutes were released. They finished with more than a 4% gain.
U.S. stocks were a little behind. The S&P 500 was up about 3%. The Dow lagged with a little more than a 2% gain. Small company U.S. stocks as represented by the Russell 2000 Index did the best, gaining over 4.25% and actually recovering on Friday. Global stocks as represented by the All-County World Index rose about 2.75%.
It was a very volatile period for commodities and the dollar. Gold was the most volatile. It rose to about a 2% gain on the fiscal cliff deal. But it declined sharply after the release of the Fed minutes. It closed with about a 0.25% loss for two weeks. Energy commodities followed a similar path, rising to a 3% gain on Monday’s close but finishing with a two-week gain of under 1.5%. Broader-based commodities were more steady with a loss of a little over 0.5%.
The dollar followed the opposite course. It declined last week but rose after the fiscal cliff deal and Fed minutes. It finished with a 1.25% gain, which is a big two-week move for a currency.
High-yield bonds had a good two weeks. Initially they lost about 0.5% but finished with a 0.5% gain. Inflation-indexed bonds did poorly, with Treasury Inflation-Protected Securities (TIPS) declining sharply for the last week and losing about 1.25%.
Some Reading for You
There was a lot of pork and special interest provisions in the fiscal cliff deal. I bring together a lot of background information here. You might also be interested in this.
The financial reports of banks haven’t improved much since 2008 and might be worse. For details, read this.
Meantime, policymakers in Washington are focused on the wrong things. The steps they’re taking won’t help the budget deficit. They need to focus on the right things.
