January 2016
January 29, 2016 05:15 p.m.
Your Retirement Finance Week in Review
Wow! Is the rest of the year going to be as turbulent as January? In 2015 volatility was low and complacency was high. All that turned on a dime when the calendar flipped.
Before we turn to the week’s review, I want to remind you about the upcoming MoneyShow Orlando. I’m now schedule to make four presentations at the MoneyShow Orlando on March 2-5 at Disney’s Contemporary Resort. This is the 35th anniversary of the show, so they’re planning some special events. Your registration is free, and you’ll receive a free special report Solid Income Picks for the Long Haul, when you register. Make your free registration here.
Central banks are back in the forefront, trying to rescue markets and economies. In late 2015, the Fed made it clear that it wanted to raise rates throughout 2016 and believed the economy not only could handle it but needed it. The European Central Bank gave the impression that its work was done.
Then, we had all the turbulence of the first weeks of 2016. In response, the Fed issued a statement this week after its meeting that many people interpreted as saying that perhaps there won’t be any more rate increases in 2016. The Bank of Japan followed by effectively setting negative interest rates. (Bloomberg.com has an informative article on negative interest rates.)
The markets loved both actions. Global stocks finally turned upward. Major U.S. indexes climbed 2.4% on Friday. European stocks rose 2.2%, and Japan’s stocks climbed 2.8%.
Even so, U.S. stock indexes will complete January with about a 6% loss despite almost a 4% return from recent lows. Biotechnology stocks, previously the market leader, lost about 22%. This is the worst month for stocks since January 2009. Bonds rose during the month, as did gold. Emerging market equities lost about 7% for the month despite almost a 5% rally in the last week. Bloomberg says China accounted for about 75% of the emerging market losses in January.
It was clear as 2015 wound down that the U.S. economy was slowing, but things seem to turn quickly in January. The latest data indicate a sharp slowing in the U.S., though it likely still is growing.
It’s also clear that globally there’s a serious risk of deflation. With interest rates near zero (and sometimes below zero) in most developed nations, central banks don’t have conventional tools that will work well. Commodity prices continue to decline, and there is low liquidity in the emerging economies that are commodity-based. China’s lower growth and sliding currency both hurts other emerging economies and exports deflation to the U.S. and other developed nations. The strong dollar holds prices lower in the U.S. High debt levels also restrain growth and prices though the developed world.
Stock investors have great faith in the central banks. They believe the banks will ensure higher stock prices in an attempt to spur growth. We’re holding some stocks in our recommended portfolios, but we’re mostly in income investments that are likely to benefit from lower interest rates, such as long-term treasury bonds and utility stocks.
The Data
There was a lot of data this week, and the bulk of it was focused on housing. The housing data was mostly positive, while the rest of the data was mixed.
Let’s get the GDP report out of the way first. I don’t pay much attention to this report or the monthly employment situation reports for the same reasons. They’re both backward-looking and based on estimates. They’re revised as time passes, and often by significant amounts. The media like to give them a lot of attention, and traders pay attention to them because all the attention moves markets. For us, they’re not very informative.
The first GDP estimate for the fourth quarter of 2015 showed only 0.7% growth. That’s a sharp reduction from the third quarter. We knew from data being issued in the fourth quarter that the economy was slowing, but I don’t think it slowed as sharply as this report says. The weakness was in two sectors we knew about: exports and business investment. I expect it to be revised a bit higher in coming months, but it won’t tell us much about what to expect in 2016.
Let’s look at housing. The two major housing price reports showed solid strength. The FHFA House Price Index reported a 0.5% increase in prices for the month and 5.9% for 12 months, while the S&P Case-Shiller Home Price Index (which is lagged by two months) showed a 0.9% increase and a 5.8% 12-month increase. This follows solid gains the two previous months. One reason for the price strength is that there are fewer homes available for sale than is normal.
New home sales surged by 10.8%, perhaps showing that the optimism in the NAHB Housing Index might be warranted. But the median home price declined 2.7% for the month and 4.3% for 12 months, indicating that builders are shaving prices to make sales.
Pending homes sales inched higher, after last month’s negative number was revised a little lower. Sales are 4.2% higher for 12 months. This indicates that existing homes sales reported in the next month or two won’t increase much.
It’s worth noting that one of the strengths in this week’s GDP report was a strong increase in residential housing investment.
Manufacturing continues to be somewhere between a recession and depression because of the combination of a strong dollar, lower global growth, and cratering commodity prices. The Dallas Fed Manufacturing Survey started the week with a sharply negative reading, its lowest level since 2009. There wasn’t anything positive in the report. The Richmond Fed followed with its Manufacturing Index. This was positive, but only slightly and not as much as last month’s survey. The Kansas City Fed reported a sharply negative Manufacturing Index and revised last month’s index down slightly to match this month’s negative nine reading. This report also was almost entirely negative.
The Durable Goods Orders report also was decidedly negative, well below last month’s reading and expectations. There weren’t any good aspects to the report, and the extent of the downturn was very surprising.
The Chicago Purchasing Managers Index closed the week with a big surprise. It rose sharply higher after a major decline last month. It now is in expansion territory and indicates the Chicago-area economy is doing well.
Despite the troubles in manufacturing, the rest of the economy appears to be growing slowly. The PMI Services Flash Index was down a little from the end of December but still indicates growth.
Consumer Confidence as measured by The Conference Board had a solid rose and was positive regarding both current situations and expectations for coming months. Plans to buy autos, homes, and appliances all increased. Yet, Consumer Sentiment as measured by the University of Michigan declined a bit. It still is among the higher readings for the economic recovery and is a solid reading.
New unemployment claims declined by a sharp 16,000 after rising to a six-month high last month. Even at last month’s high number, new claims are near historic lows.
The Employment Cost Index indicates inflation isn’t likely to be a problem soon. The index rose only 0.6% for the quarter and 2.0% for the year. That shows an increased rate of wage inflation, but it is not near a level that typically puts upward pressure on prices.
The Markets
As mentioned, stocks had a good rebound at the end of the week after struggling earlier in the week. Emerging markets led the way with a gain of almost 5%. The Dow Jones Industrial Average an All-Country World Index each gained more than 2.5%. The S&P 500 returned over 2%. The Russell 2000 U.S. Smaller Companies Index lagged with a gain of under 2%.
Bonds also had a good week. Treasury Inflation-Protected Securities (TIPS) did best, rising almost 1.2%, perhaps indicating investors are less worried about deflation than they were last week. Long-term treasuries rose 1%. High-yield bonds gained just under 1%. Investment-grade bonds rose about 0.5%.
The dollar gained over 0.2%.
Commodities had a very good again, also recovering from losses early in the week. Energy-based commodities rose 5%. Broad-based commodities rose 3.5%. Gold rose 1% and was up about 2% at midweek.
Some Reading for You
Here’s a piece about the five most common regrets people have shortly before they pass away.
This is a challenge to the widespread notion that lower oil prices are going to cause a recession.
Did you know that if you give art to a museum it’s unlikely anyone will see it and that most museums display only about 5% of their holdings.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
January 22, 2016 04:15 p.m.
Your Retirement Finance Week in Review
I hope all of you affected by today’s winter storm are safe and warm. Elaine and I managed to make it to Naples, Florida, in time to avoid the snow in Virginia.
Just a reminder: I’ll be making several presentations at the MoneyShow Orlando on March 2-5 at Disney’s Contemporary Resort. This is the 35th anniversary of the show, so they’re planning some special events. Your registration is free, and you’ll receive a free special report Solid Income Picks for the Long Haul, when you register. Make your free registration here.
As you know, the markets took a decidedly negative route to start 2016. There are several factors working together to push markets lower. Since the forces are working together, they create a powerful deflationary force on the global economy and a bearish force on many markets.
Let’s start with China. It greatly increased its debt in 2008 and following years to keep its economy growing through the financial crisis. This also helped cause a global boom in commodity prices because of much higher demand from China. But China’s growth rate and the amount of debt it accumulated were unsustainable. For the last couple of years China’s been trying to adjust its economy and restructure its debts.
The changes in China caused a sharp drop in demand for commodities. This created a downward spiral in which commodity prices drop and problems are created in countries with commodity-based economies. These countries generally have to obtain U.S. dollars to pay their debts. That creates a dollar squeeze, pushing the dollar higher. A higher dollar helps push commodity prices lower, increasing the decline in commodities. So, a downward spiral is in motion.
The imbalances in China’s economy also put downward pressure on its currency. There’s been strong downward pressure on the currency since China announced a modest devaluation in 2015. That has several effects. First, a devaluation by China has deflationary effects on the rest of the world. Second, China is selling its currency reserves (such as its large holdings of U.S. bonds and other assets) to try to manage the devaluation. There are different estimates of how much of its massive reserves China has sold and how much it has left.
China is not the only country selling its dollar reserves. Most market participants believe there is strong selling from Saudi Arabia and perhaps from other countries. Saudi Arabia and these other countries need to sell their reserves to replace lost oil and commodity revenue. When other countries sell their reserves, they reduce liquidity in markets, especially U.S. markets. The currency reserve selling explains much of the sharp, steady declines in U.S. markets in early 2016.
There are positive effects from these events. One is that our positions in long-term U.S. treasury bonds rise in value. While selling by China and other countries puts downward pressure on treasury bonds, the deflationary forces and general flight to quality put upward pressure on treasury bonds. So far, the upward pressures have prevailed. Treasuries are a great asset to hold in a deflationary environment. Other assets in our portfolios also held their value much better than the markets that were making all the headlines, including utility stocks, preferred stock, and emerging market bonds denominated in U.S. dollars.
The key takeaway from these events is that the power of central banks is severely diminished. Quantitative easing was a powerful tool that stabilized economies and increased asset prices without help from fiscal policy. But the power of QE and other tools is quite weak in this environment. In today’s The Wall Street Journal online there was a headline, “Central Banks Need to Step Back, Some Big Investors Say.” It’s clear we’ve moved into a decidedly deflationary environment. The central banks need to maintain liquidity, but other policymakers need to come off the sidelines and institute positive policies.
The Data
A small amount of data was issued this week, but it was interesting.
Let’s start with the Consumer Price Index. The headline number for the last month was negative 0.1%, meaning deflation, and for 12 months was only 0.7%. That’s well below the Fed’s targets. But some analysts and media reports touted the report as supporting further interest rate increases by the Fed because after excluding food and energy prices rose 0.7% for the month and 2.1% for 12 months. That looks like steady price increases after factoring out the decline in gas prices. But that’s misleading. The way rent is used in the CPI greatly exaggerates overall inflation in the current environment. Also, the fresh downturn in commodities and oil in particular will bring the headline number down some more in coming months. The steady rise of the dollar also puts downward pressure on the CPI. To me, the report continues to indicate that deflation is much more of a risk than inflation.
There were three housing reports, all reasonably positive. The Housing Market Index from NAHB was down a little but still is in healthy positive territory. The weakness in new home sales continues to be the weakest link in housing. Housing starts and new permits declined over 2%, but that follows very strong increases in November. The 12-month increases are 6.4% for starts and 14.4% for permits. Those are healthy one-year numbers. Existing home sales, on the other hand, had a 14.7% increase for the month and 7.7% for 12 months. That follows a decline in November, but the November number as we said at the time was skewed by a change in the rules for calculating the sales number. That rule change pushed some of November’s sales into December. In addition median home prices increased 1.9% for the month and 7.6% for 12 months.
Overall, it appears that housing continues to improve. It is improving a at a slower rate than in 2014, and it slowed a bit the last few months of 2015. Two problems continue to hold back housing. One is the lack of first-time home buyers, due largely to tougher mortgage standards and perhaps high unemployment and student loan debt. The other problem is the lack of inventory for existing home sales. That’s partly due to people not wanting to sell at today’s prices and perhaps to tougher loan standards making it difficult to trade up homes as easily as in the old days.
New unemployment claims increased 10,000. That still keeps the number well under 300,000 and near the historic lows.
There were two reports on manufacturing, and they were mixed. The Philadelphia Fed Business Outlook Survey was negative, though not as negative as last month. It is the best reading since August. Most of the components were negative, though new orders and shipments were positive.
The PMI Manufacturing Index Flash for the middle of the month increased by 1.4 points to remain solidly above 50 at 52.7. A reading of 50 or above indicates expansion. This index consistently has been more positive than other manufacturing data for some time.
The Leading Economic Indicators as compiled by The Conference Board declined 0.2%. That was expected because of stock market declines and an increase in new unemployment claims. There were gains in both the coincident and lagging indexes.
The Markets
Markets generally staged recoveries late this week as oil’s price increased sharply and restored some confidence in at least a few investors.
Emerging market equities led the way with a gain of more than 2.5% for the week. Earning gains around 1.75% were the All-Country World Index and Russell 2000 U.S. Smaller Companies Index. The S&P 500 gained about 1.5%. The Dow Jones Industrial Average lagged with a gain of about 0.5%
Bonds have had quite a spurt but gave up some of those recent gains when stocks recovered late in the week. High-yield bonds fared best, gaining about 1.25%. Long-term treasuries were up over 1.5% at midweek but closed with a fractional loss. Investment-grade bonds and Treasury Inflation-Protected Securities (TIPS) each lost about 0.5%.
The dollar had a gain of about 1% for the week.
Broad-based commodities were down sharply at midweek but closed with a gain of about 2.25%. Energy-based commodities gained sharply late Thursday and Friday to finished with a 3% gain for the week. Gold gained 0.5%.
Some Reading for You
Is China running out of reserves? This article takes a middle of the road view.
Here’s an example of why you need to include digital assets in your estate planning.
Here’s the latest investor letter for distressed investor Howard Marks.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
January 15, 2016 04:45 p.m.
Your Retirement Finance Week in Review
The small amount of economic data issued this week was mostly positive, but you wouldn’t know it from what happened in the markets. After relative calm the first few days of the week, stocks closed sharply lower for the week.
For several years I’ve said many times that deflation is a bigger risk than inflation. Investors finally are realizing that. Risky assets that depend on growth and inflation declined. Assets that benefit from deflation, such as bonds, rose.
Investors’ concerns are no mystery. The news from China isn’t positive. Capital flight, slow growth, a falling currency, and declining stocks all turn the China growth story on its head. Perhaps more unsettling to investors is that China’s policymakers made several key mistakes the last couple of years. That undermines the long-time belief that whatever else they are, China’s leaders are competent. Now, they aren’t looking all that skilled.
Slower growth in China means less demand for commodities. That’s put commodities into a downward spiral. The prospect of Iranian oil hitting the markets next week also pushed oil down another notch or two.
The economic data from the U.S., China, and elsewhere isn’t as bad as the investment markets make it seem. The markets could be overreacting. There’s an old saying that the stock market has forecast nine of the last three recessions. Or markets could be anticipating a fresh decline in growth.
Our Retirement Watch portfolios are well-suited to the current environment. We’ve believed for a while that the best opportunities for investors are those that benefit from low inflation or deflation, low inflation, and modest growth in the U.S.
The risk remains that the current disinflation turns into outright deflation. Central banks around the globe have limited tools to fight another downturn, because they all but exhausted their tools to establish modest growth since 2008. Each round of quantitative easing was less effective than the previous one. Because of that risk we have low exposure to growth-oriented assets and above-average exposure to assets that do well when growth and inflation are declining.
The Data
Manufacturing received a couple of bad report cards this week. The Empire State Manufacturing Survey was decidedly negative. Last month it registered a negative 4.59, and expectations were for a reading of around negative 7. Instead, it came it at negative 19.37. That’s the lowest reading since April 2009, at the tail end of the financial crisis.
Industrial Production also declined more than expected at a 0.4% rate. Last month was worse, but economists were expecting something better this month. Part of the decline was due to lower utility output, which was a result of unusually warm early winter weather in parts of the country. So, in that respect the report is misleading. But in manufacturing and mining, last month’s numbers were revised downward and this month’s numbers were weak.
It’s worth reminding ourselves that manufacturing is a fairly small portion of the U.S. economy and labor market. For a couple of years now the overall economy has growth near its long-term average rate while the manufacturing has been in a depression. The manufacturing problems are due to falling commodity prices, the strong dollar, and weak economies outside the U.S.
Retail sales also were weak, even after excluding autos and gasoline. But the previous month was revised higher, and the number is volatile from month to month. It takes several months of consistent data to determine that a trend is in place. Even so, the retail sales report was not consistent with some reports of strong online sales over the holiday season and other anecdotes of a strong consumer.
Good news was delivered from the NFIB Small Business Optimism Index. The index rose. In addition, there was particular strength in the components on plans to hire additional workers and make additional capital investments. Sales expectations also were higher.
The JOLTS (Job Openings and Labor Turnover Survey) also had good news about the labor market. It puts job openings at highs not only for this cycle but for longer periods. In addition, the rate of employees quitting is at a recovery high, which often is a sign that employees are able to find better jobs. The firing rate also is at normal levels.
New unemployment claims rose, but not enough to offset all of last week’s decline. So, the new claims remain near all-time lows.
The Fed released its latest Beige Book, which didn’t have any new insights about the economy. It indicated that consumer spending is growing modestly and there are few signs of higher inflation.
Producer prices declined for December, and that gave producer prices a negative 1% rate for 2015. After subtracting food and energy, prices rose must barely for the month and for the last 12 months.
Despite all the recent negative headlines, Consumer Sentiment as measured by the University of Michigan rose in the mid-month flash reading. The expectations component was much higher. The current conditions component declined, possibly due to all the negative news about China, oil, and stocks.
The Markets
Stocks rose early in the week, taking a break from last week’s sell off. But that didn’t last as oil prices plummeted and China’s stock indexes returned to their lows of last fall. Emerging market equities did the worst, losing 4%. The Russell 2000 U.S. Smaller Companies Index lost 3.5%. The All-Country World Index lost 3%. The Dow Jones Industrial Average lost 2.5%, while the S&P 500 lost 2%. Many indexes have returned to their lows of the August-September 2015 decline.
Bonds generally had a good week. Long-term treasuries were the week’s leader, gaining 3%. Treasury Inflation-Protected Securities (TIPS) gained a fraction, and investment-grade bonds lost a fraction. High-yield bonds followed stocks as usual, losing about 2.25%.
The dollar was higher all week and gained about 0.5%.
Commodities led everything lower. Energy-based commodities lost about 5.5%. Broader-based commodities lost over 3.5%. But gold did well, gaining almost 1%.
Some Reading for You
Here’s a review of just how bad China’s debt situation is.
This is the latest report to shareholders of the Wasatch-Hoisington U.S. Treasury fund.
This article explains why exercise benefits a lot more than your heart.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
January 8, 2016 04:20 p.m.
Your Retirement Finance Week in Review
The quiet holiday season turned into a New Year’s fireworks display, primarily thanks to China and with some help from South Korea, Iran, and Saudi Arabia.
Before we discuss this week’s events, I want you to know that I’ll be making several presentations at the MoneyShow Orlando on March 2-5 at Disney’s Contemporary Resert. This is the 35th anniversary of the show, so they’re planning some special events. Your registration is free, and you’ll receive a free special report Solid Income Picks for the Long Haul, when you register. Make your free registration here.
We can see how much the global economy and markets have changed by observing how events in China strongly effect many markets and economies. Slower growth in China spooked not only its own investors but also global investors. It’s also created concerns about the global economy.
Most importantly in the short term is that China’s manipulations of its markets and economy clear aren’t working. In fact, they’re making things worse. This was predictable to those familiar with markets, but not to China’s officials. Over a year ago some rules were changed to encourage more investment in stocks by China’s citizens. This quickly created a bubble. After the bubble burst, officials tried to limit the damage by restricting trading and short selling and by having government entities buy stocks.
They also put in place circuit breakers that closed the markets if prices declined too much. Those circuit breakers closed markets several times this week after sharp declines. By the end of the week stock market regulators concluded closing the markets was a mistake, and they suspended the circuit breakers. Closing markets makes the situation worse by preventing a trend from playing out.
Here’s a capsule of the big picture issues in China.
The country has too much debt. As a result, growth is slowing. China is trying to restructure its economy and reduce its debt but without letting growth decline too much. It’s been a bumpy ride so far. One way China is trying to cushion the transition is by selling some of the currency reserves it accumulated over the last couple of decades. It is selling primarily dollar-based assets, mostly bonds. This selling puts upward pressure on U.S. interest rates and downward pressure on the dollar. But it hasn’t been enough to overcome contrary forces. For the most part U.S. rates have been stable or falling, while the dollar is stable to rising.
Slower growth in China means slower growth in other countries, especially those that exported natural resources to China.
The major factor now is that after the stock market crisis of last summer, China systematically sought to weaken its currency. Policymakers wanted to make China’s products cheaper to other countries to stimulate demand. The unintended but predictable effect was that investors in China began to sell assets and currency. They wanted to move their wealth to assets based in other countries and currencies. That’s been a major support of real estate markets around the globe, but it hasn’t been good for China’s economy of assets.
China’s currency reserves are declining rapidly. Some analysts estimate that at recent rates the country’s once-massive reserves of foreign currencies and assets will be depleted late in 2016 or early 2017.
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