July 2012

Last update on: Oct 01 2019

Topics: Bob's Journal, Retirement Investing, Stock Markets and the Economy

July 27, 2012 04:30 p.m.
Your Retirement Finance Week in Review

There’s been a lot happening in the markets and economy, and more will happen the rest of the summer. This fall will be especially eventful with elections, more deadlines in Europe, and the need for legislation to avoid the “fiscal cliff” in the U.S. We’re going to bring all this together, and more, in another free investment presentation and webinar on “Facing the Fiscal Cliff and Other Obstacles” on Wednesday, Sept. 5 at 3:30 p.m. eastern time. It’s free, but attendance is limited. To reserve your spot, call 877-282-4609 or e-mail info@tjtcapital.com. I discuss my webinars in my role as Managing Member of Carlson Wealth Advisors, LLC and its relationship with TJT Capital.

Policymakers are at it again, manipulating the markets with the hope it will help the economy. This week European Central Bank President Mario Draghi began things with Thursday’s comments that the ECB would do “whatever it takes” to preserve the euro. Presuably this included buying government bonds. Leaders of Germany and France followed on Friday with a statement that they, too, would do whatever it takes.

Investment markets responded strongly to the words with strong equity gains on Thursday and Friday.

But investors shouldn’t get too excited. A lot of the rally likely was short sellers covering their positions. Leaders of the German central bank put a damper on things late Friday by saying they didn’t agree with the plan implied by Draghi. Investors ignored part of Draghi’s initial comments. He qualified things by saying the ECB’s actions would be within its mandate.

More importantly, we’ve been down this road before. Words from central bankers and policymakers can move markets for a while, but fundamentals eventually dominate. Each time words moved the markets, the markets eventually moved to worse positions than they held before the words. Verbal assurances and statements must be followed by substantive, helpful actions.

The things to focus on are that austerity is pushing many economies into depression. Yields in Spain and Italy now are at breaking points and continue to rise. There’s a capital flight in Europe, which is leading to short-term borrowing problems and further weakening the banking system. There are a lot of small news stories and anecdotes that don’t get enough attention. Add them up and it appears that the current situation is unsustainable and is unraveling behind the scenes. The behind-the-headlines problems most likely are what prompted Draghi to speak his bold words.

The Data

Before looking at the regular data, here are two unconventional data sources. The American Trucking Association issues a regular report of monthly tonnage shipped via truck. The latest data indicate an economy growing more slowly. You can read about it here. The Chemical Activity Barometer of the American Chemical Council is a good leading indicator of industrial production and for some months has been pointing to flat to negative growth.

GDP was the week’s big report, and it revealed what the other data have been saying for weeks. The economy still is growing but the rate of growth continues to slow. The good news is the first quarter’s growth was revised upward slightly from 1.9% to 2.0%. But the first reading of the second quarter revealed slower growth of 1.5%. Sectors with major reductions were consumer spending, residential and nonresidential construction, and imports. The good news was inflation declined a bit to 1.6% annualized.

Consumer sentiment as measured by the University of Michigan rose slightly after several months of declines. But the expectations section of the index continued its months of declines.

The housing data put investors on a rollercoaster this week. Initially investors were optimistic when the FHFA House Price Index continued a string of gains and came in higher than expectations. But the optimism was squashed over the next few days as new homes sales and pending home sales declined and were much worse than expected, especially after the FHFA data.

Manufacturing was leading the recovery from the 2009 bottom but more recently has been mixed. An assortment of data this week also was mixed but generally showed manufacturing still is growing but at a much slower rate than a year ago. The rate of growth appears to be steadily slowing.

The Chicago Fed’s Manufacturing Survey improved a little but still showed growth below the historic average. The Richmond Fed Manufacturing Index showed a sharp drop and was well below expectations. The Kansas City Fed Index showed a small improvement but still registered slow growth.

The PMI Manufacturing Index Flash fell. It shows growth but growth at the slowest rate since the recovery began. Durable Goods Orders initially appeared to be positive, coming in positive and well above expectations. But analysis revealed the improvement was in the volatile aircraft segment. Separate that out and durable goods orders fell and fell more than expectations.

Jobless claims continued their recent pattern of being volatile without establishing a pattern. This week they declined sharply. The consensus is that the recent volatility is due to some changes in behavior by auto manufacturers that government statisticians aren’t adjusting for. The important conclusions are that jobless claims aren’t declining much. Coupled with the other economic data, it appears the economy isn’t growing enough to bring the unemployment rate down much and restore an average or better level of economic growth.

The Markets

Market action this week shows clearly how factors outside the markets and their fundamentals can affect returns.

Gold rose sharply on Thursday and Friday after being flat for most of the week. It registered a 3.25% return for the week, all on the expectation that central banks soon would begin depreciating their currencies.

Agricultural commodities have been rising recently because of the drought in the U.S. It’s likely to reduce supplies and increase prices. A number of companies recently issued warnings with their earnings reports, saying they might have to absorb some commodity price increases in coming months. Diversified commodities rose about 0.5% this week.

Energy-related commodities were driven higher by events in Syria and Iran that increase concerns about the supply of oil from the Middle East. They rose about 1.5% for the week.

Because commodities rose sharply, emerging market stocks also rose. They registered a gain of about 6% just for the week. Global stocks, as measured by the All-Country World Index, were a bit behind with a 4.5% gain. Large company U.S. stocks trailed more, registered gains of under 4%. All of those gains came on Thursday and Friday. Small company U.S. stocks continued to lag with gains of 2.5% for the week.

Conservative investments were the week’s losers. Long-term treasuries lost almost 3%. The dollar lost a little less than 2%. Investment-grade bonds lost a fractional amount. High-yield bonds gains about 1.5%.

Some Reading for You

There were a number of interesting items in the public blog this week. Here are just a few highlights:

There was a nice story in The Washington Post about the life of an art collector who died recently. He was a postal worker, but he and his wife accumulated an art collection worth millions. Read how.

A lot of research has come out recently questioning either whether quantitative easing works or whether new QE will work as well as in the past. Read a good compilation here.

One of the themes of my book Invest Like a Fox…Not Like a Hedgehog is that investors spend too much time data mining or looking for the ultimate timing signal. Read an update from one of the researchers I discussed in the book.

I comment and link to these and other items on my public blog at http://www.bobcarlson.net.

July 20, 2012 05:30 p.m.
Your Retirement Finance Week in Review

There’s a conflict in the markets and the economic data. On one side of the conflict are global stock indexes. On the other side are other markets and the economic data.

The economic data reveal that the U.S. economy is slowing as is the global economy. Europe’s in a recession; growth is slowing rapidly in China; and the U.S. still appears to have positive growth, but the rate’s been slowing and is approaching zero. This is reflected in bonds and commodities. Interest rates are declining in the U.S. and Germany, indicating prospects for low inflation and growth. Commodity prices also have been declining, though they recovered some the last few weeks.

The U.S. stock market and many global markets don’t reflect this view. They are below the double-tops of April and May but are well above the bottom of early June. Equities have been rising the last couple of weeks even as most of the data worsened.

I suspect this dichotomy exists because stock investors are anticipating another strong monetary stimulus program. I also think they’re fooling themselves. As I say in the latest Retirement Watch (now available on the web site), the central bankers have acted during the crisis only after stocks declined significantly and economic growth seemed to be declining. There also were liquidity problems facing banks. None of those factors is present. Bernanke has tried to make clear the Fed will act only when there is a risk of deflation or of unemployment rising. The economy is so weak that the conditions could appear quickly, but stock investors are hoping the Fed will act before stocks tumble. I think they’re taking a very big risk.

The Data

The data for the week was mostly negative. Several months of data reveal an economy that is slowing but probably still growing at a very slow rate. It’s close to stall speed, the point at which growth is so weak that businesses and households become more cautious, pull on the reins, and cause growth to turn negative. Some people believe we’re already in a recession. See the link under “Some Reading For You.”

I’ll start with the positive news. Homebuilders continue to report positive things. Traffic of prospective buyers to new homes is rising substantially (though still well below long-term averages and the pre-bust peaks). New home sales also are rising above the bottom, but they still aren’t at the levels reached when federal tax incentives were in place. Following that, new building permits and starts gradually are rising. These all are still at depressed levels but are adding to economic growth because they are improving.

But everything isn’t rosy in housing. Prices of new homes still aren’t rising, and builders seem to be using a lot of incentives to generate sales. Also, existing home sales, a sign of the broader market, declined in June and have been in a narrow range for about a year. Good news is that prices rose to their highest levels in two years.

Overall, it appears that the housing market finally has stabilized and awaits a stronger labor market before it can improve.

Other good news is that inflation is under control. In fact prices for June were unchanged and are up only 1.7% for the last 12 months as measured by the CPI. Prices minus food and energy were up 0.2% for the month and 2.2% for the last year. Overall inflation is at the Fed’s target, so it has no reason to either tighten or loosen monetary policy.

Industrial production rose more than expectations and bounced back from last month’s negative report. The growth was widespread. But the number contradicts other manufacturing reports. More importantly, the production report showed a decline in new orders. That is consistent with other economic data showing demand is slowing across the economy.

The rest of the news was bad. Retail sales tumbled more than expected. Sales were weak almost across the board. Auto sales were weak, despite positive numbers reported by the manufacturers.

The Empire State Manufacturing Survey was generally positive and above expectations, but new orders declined there, too, indicating weakening demand. The Philadelphia Fed Survey, which has been weaker than Empire State recently, again came in very negative and below expectations. The Philadelphia Fed survey covers the mid-Atlantic states and shows clear weakness in that area. Nationally, manufacturing appears to be growing very modestly but well below the peak levels of the recovery.

The Index of Leading Indicators turned negative and worse than expectations. Only a few components of the index were positive with the negatives being broad-based. Even the positives weren’t very positive. Low treasury and federal funds interest rates count as positive, though they’re being kept low by the Fed because the economy is so weak.

New unemployment claims jumped again. A sharp decline last week (which was revised slightly upward) generated some optimism. But this week’s rise by 34,000 to 386,000 dampened that optimism.

The Fed released its periodic Beige Book in which it concluded that the economy continues to expand at a “modest to moderate pace.” The report was a bit more positive than the recent data but does indicate that growth is slowing. The only issues are how much the economy is slowing and whether it will settle at a positive growth rate or slide into negative territory.

The Markets

Commodities had a very strong week, the second in a row, before cooling a bit on Friday. Perhaps this is an early sign of economic growth returning or is simply a bounce off the recent bottom as bargain hunters do some buying. The announcement of some recent stimulus measures in China could be helpful to commodities prices. Energy-based commodities rose almost 5%. Broader-based commodities, as measured by the UBS-Dow Jones index rose just under 4%. Gold didn’t fare as well as other commodities, dropping about 0.5%.

Stocks also had a decent weak but gave up a lot of the week’s gains on Friday. The S&P 500 rose about 1%, as did emerging market stocks. The broad-based All-Country World Index and the Dow 30 were a bit behind returning a little under 1%. Small company U.S. stocks reversed their recent outperformance. They lost 0.5%.

The dollar and long-term treasury bonds were flat most of the week, but the dollar finished flat while the treasury lost a small amount. Investment-grade bonds and high-yield bonds each gained a little under 1% for the week.

Some Reading for You

A few analysts are arguing that we’re already in a recession. A collect some links to their recent discussions here.

Germany will decide on the course of the European debt situation, and there’s a battle in Germany over the route to take. You can read a good summary of the arguments with descriptions of the proponents here.

TARP is the most controversial of the bailout programs. There’s a new book by the former Treasury Special Inspector of the program coming out. Read a preview here.

I comment and link to these and other items on my public blog at http://www.bobcarlson.net.

July 13, 2012 04:35 p.m.
Your Retirement Finance Week in Review

There’s been a lot happening in the markets and economy, and more will happen the rest of the summer. This fall will be especially eventful with elections, more deadlines in Europe, and the need for legislation to avoid the “fiscal cliff” in the U.S. We’re going to bring all this together, and more, in another free investment presentation and webinar on Wednesday, Sept. 5 at 3:30 p.m. eastern time. It’s free, but attendance is limited. To reserve your spot, call 877-282-4609 or e-mail info@tjtcapital.com. I discuss my webinars in my role as Managing Member of Carlson Wealth Advisors, LLC and its relationship with TJT Capital.

Europe no longer is front and center with global investors. Instead, they’re focused on fresh signs of a global economic slowdown. Until this week, investors comforted themselves with the notion that while Europe is sinking rapidly, the U.S. still is doing well and China can solve its problems. Decoupling was the buzz word. This week the data convinced more investors that’s a shaky case.

I think investors also are beginning to realize that the floor they think central banks are putting under the markets isn’t as high as they thought. A review of the actions taken since 2008 shows the central banks only acted after significant equity market declines and clear evidence that economies were rolling over. Also, monetary stimulus has been less effective each time. As we passed the year’s midpoint, it appears more people are focusing on the “fiscal cliff” of tax hikes and spending cuts scheduled for 2013 and the negative effects on the economy.

A final issue is that earnings season began, and they aren’t as robust as in recent quarters. Stock investors have been content since 2009, because corporate profits continued to hit new records. Productivity increases and emerging market growth allowed higher profits and revenues without much growth in the U.S. The early signs are that the pattern is ending.

I think it’s clear that there aren’t going to be fast or easy solutions to the high levels of debt in the developed world. We’re going to have slow economic growth, modest profit growth, and low inflation. The business cycle is going to be shorter and more volatile, as the economy is very dependent on monetary and fiscal stimulus offsetting deleveraging.

The Data

I’m introducing you to a new, forward-looking economic data, the Chemical Activity Barometer, prepared by the American Chemical Council. The ACC contends that chemicals are among the earliest supplies in the production process. Changes in chemical sales and production are signs of changes in industrial production. The ACC says the CAB leads the business cycle by about eight months and has a high correlation with industrial production. The June CAB was down 2.5% from its peak, and a decline of 3% or more has predicted 10 of the last 11 recessions. So, it’s flashing a warning sign.

Another report that shook up investors this week was the NFIB Small Business Optimism Index. It took a tumble, what the NFIB itself called a “significant” decline, from last month and was below expectations. The report was weak across the board, with only one of 10 measures improving.

Some people saw positive signs in the Consumer Credit report on Monday, because credit use rose significantly. Credit card use in particular rose. But a close review indicates there isn’t much to be excited about. First, non-mortgage borrowing isn’t enough to spur economic growth. Mortgage borrowing remains very low and stagnant, and non-mortgage borrowing still is well below pre-crisis levels. Also, non-mortgage credit is stabilizing around current levels. Most of the growth the last couple of years was in student and auto loans. Those growth rates aren’t sustainable. And the credit card growth in May that offset some declines in the student and auto loans also isn’t sustainable. Households won’t continue spending more than they earn indefinitely. Indeed, since stock prices peaked we see signs that savings rates no longer are falling and consumers are starting to pull back. I don’t see the latest increase in credit card use as a trend. Unless we see more stimulus, increases in stock prices, and a reversal of next year’s scheduled tax increases, consumer credit will maintain current levels or decline.

The release of the Fed’s minutes also moved markets, as they seemed to make clear the Fed won’t take a major action this summer and probably won’t do anything until after the election unless a crisis arises.

Producer prices unexpectedly rose last month. Investors expected a decline after a sharp decline the previous month. The change could be a one-time event due to a substantial increase in the cost of light trucks. Energy costs have been declining substantially. Food costs also have been, but there are fears they’ll rise because of the nationwide drought.

Consumer sentiment as measured by the University of Michigan notched its second month of declines after rising for seven months.

New unemployment claims provided a bright spot, because they declined significantly to 350,000. That’s where many investors were hoping to see claims for a couple of months, and it almost takes us back to the lows of April.

Globally, there were fresh reports that growth in China is slowing more than most analysts anticipated. There are more people leaning toward the view that there will be a “hard landing” in China and the government doesn’t have as much control over things as believed.

The Markets

The markets in the last week were a lot of volatility and noise on a trip to nowhere. Steady declines through early Thursday were reversed from mid-day Thursday through Friday’s close. The S&P 500, Dow Jones Industrial Average, and All-Country World Index closely tracked each other and ended the week right about where they started. They avoided having seven straight days of declines with Friday’s rise.

Emerging market stocks and small company U.S. stocks were different stories. Emerging market stocks lost more ground but also rose more sharply on Friday. It also finished the week with no change. Small company stocks as measured by the Russell 2000 Index had been doing better than other indexes in recent months. But they lagged all the others this week, losing 3% at Thursday’s low. They surged ahead Friday but still recorded a 0.5% loss for the week.

Commodities also had an interesting week, largely tracking stocks. Gold was down 2% at Thursday mornings low but rocketed ahead on Friday’s opening before fading to unchanged for the week. Energy-based commodities had the best week, staying flat in the early days and rising Thursday and Friday for more than a 2% gain and status as the week’s best return. Broader-based commodities were a little behind, with a gain of under 1.25%.

Among bonds, long-term treasuries had the best week. This week’s treasury auction showed strong demand for U.S. bonds and registered a new low interest rate. The ETF was up almost 1.75% on Thursday but gave up some ground on Friday. It had about a 1% gain for the week. Investment-grade corporate bonds rose steadily for the week for a 0.75% gain. The dollar moved in a narrow range all week and about unchanged. High-yield bonds had small losses most of the week but recovered on Friday for no gain for the week.

My sense is that Friday was a short-covering rally and people buying because prices declined so much the last few weeks. Most assets appear to still be trapped in trading ranges, though for equities and commodities the highs in the ranges seem to be declining. We’ll have to see if this rally lasts more than a few days before altering the portfolios.

Some Reading for You

Marketers study the way people think and act. You should, too. There are certain types of mistakes people are programmed to make if they aren’t thoughtful. Read how marketers take advantage of them here.

Are central banks buying gold to keep a floor under it? It’s an interesting question, not least because gold bugs frequently accuse central banks of selling gold to depress the price. The FTAlphaville blog presents evidence that they’re doing the opposite now.

With the Supreme Court approving the Affordable Care Act of 2010, it looks like the transfers from Medicare, especially Medicare Advantage plans, will go through. Read some interesting details about that here.

I comment and link to these and other items on my public blog at http://www.bobcarlson.net.

July 6, 2012 04:15 p.m.
Your Retirement Finance Week in Review

There’s been a lot happening in the markets and economy, and more will happen the rest of the summer. This fall will be especially eventful with elections, more deadlines in Europe, and the need for legislation to avoid the “fiscal cliff” in the U.S. We’re going to bring all this together, and more, in another free investment presentation and webinar on Wednesday, Sept. 5 at 3:30 p.m. eastern time. It’s free, but attendance is limited. To reserve your spot, call 877-282-4609 or e-mail info@tjtcapital.com. I discuss my webinars in my role as Managing Member of Carlson Wealth Advisors, LLC and its relationship with TJT Capital.

This week likely will be remembered as the week the impotence of central banks was exposed. There were apparently coordinated monetary policy easings by the European Central Bank, Bank of China, and Bank of England announced policy moves within a short time of each other. Global equity markets declined in response. Even gold fell. The economic data from the U.S. and most of the world has been consistently negative the last few months, so investors both expected the moves and probably believed they weren’t enough to reverse recent trends. Some analysts argued that the move by China indicates that its next batch of data, due within a few days, will be worse than expected.

The monetary stimulus is in response to slower economic growth almost everywhere on the globe. But investors are aware that each round of monetary stimulus since 2008 has been less effective than the previous one.

Investors also are aware that policymakers aren’t dealing with the real problems, and fiscal policy changes are needed. In Europe, which continues to deteriorate, liquidity and the lack of monetary stimulus are not the problems. Solvency of both governments and banks is the problem. Officials need to decide who will bear the cost of the loans that can’t be paid and what the process will be. Otherwise, we’ll stumble along as we have until we hit a wall and have an uncontrolled unwinding as happened when Lehman Brothers filed for bankruptcy.

Central banks will continue to ease in the face of declining growth. The burden will be on fiscal authorities now, and central banks aren’t likely to be making big quantitative easing moves unless we shift from slow, positive growth to negative growth.

Things will become very interesting in the coming week, because earnings report season begins. Earnings forecasts have been declining along with the economic data. But there’s a lot of difference over whether there will be only slower earnings growth or actual earnings declines. The revenue numbers also will be closely watched on many companies, to see whether demand has fallen to the point that revenues decline from last quarter or last year.

The Data

There wasn’t a lot of data this week, but what there was is generally considered important and worse than expected.

The focus was on jobs since this week the monthly employment situation reports were issued. Job creation was much less than expected and less than needed to reduce unemployment and increase household incomes. Only 80,000 jobs were created, and previous months’ data were revised down by about 1,000 jobs. Some positive signs in the report were greater-than-expected increases in average hourly earnings and hours worked. Also, manufacturing employment increased, which is contrary to

July 2012

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