July 2013

July 26, 2013 05:45 p.m.
Your Retirement Finance Week in Review

This was a quiet week in the markets and the economy. All markets traded in fairly narrow ranges but trended towards negative territory. Next week will be a big week for data, with the employment situations reports coming on Friday along with personal income and outlays. There will be a few other reports of interest during the week. But we’re likely to have quiet markets the first four days of the week, and then traders will react to Friday’s labor market reports.

The Data

Housing and manufacturing data were the bulk of the reports in a light week for economic data.

The manufacturing reports were mixed. Recall that last week the Empire State and Philadelphia Fed reports were positive surprises, indicating that manufacturing was accelerating from the pause of earlier this year. The Richmond Fed report, however, was well below expectations and last month’s number. It showed a sharp contraction, with almost all of the factors down. The Kansas City Fed Manufacturing Report, however, showed a moderate rise that exceeded expectations and was well above last month’s level.

The PMI Manufacturing Flash Index showed a nice increase from the mid-month number and also last month’s final number. Durable Goods Orders showed a sharp increase, but that was due mostly to the volatile aircraft orders. Exclude them, and the number was flat and below expectations, though last month’s report was revised a little higher. But details in the report showed positive trends for factors such as unfilled orders.

Bottom line: Manufacturing has recovered a bit from its slow down in late 2012 and early 2013. But it is not robust and varies around the nation. It no longer is the major driver of economic growth the way it was after 2008. Businesses seem to be following household demand carefully and scaling their operations to match the latest shifts in demand. Businesses aren’t willing to get ahead of demand and count on future demand.

Higher mortgage rates might be having at least a temporary effect on housing. Sales of existing homes were down a bit and were below expectations. The good news in the report was that prices increased again and the number of distressed sales continues to decline. One reason sales are down is that inventory is tight. Limited inventory puts upward pressure on prices but reduces the number of transactions.

Another report showing home price increases as the Federal Housing Finance Agency House Price Index. The annual rate of increase now is 7.3%. The rate of increase cooled a bit this month, perhaps due to higher mortgage rates, but continues at a strong rate.

New home sales also rose sharply to a new recovery high. A caution is that the numbers for the last two months were revised down. Another caution is that prices declined for the second month in a row. But supply of new homes still is tight, so that should put a floor on prices.

New unemployment claims rose a bit, but the number is within the recent range and indicates a stable labor market. There will be a slow, steady improvement in the unemployment rate, so we’re a long way from the Fed making a bit change in policy.

Finally, consumer sentiment as measured by the University of Michigan rose again to its highest level of the recovery. Sentiment also seems to have increased during the last half of July. So far, it appears that higher home prices, a decent labor market, and rising stock prices are boosting household spirits. There’s a potential for sentiment to dip if higher interest rates slow housing sharply or the stock market declines.

The Markets

 It was a good week for emerging market stocks. They rose about 1.5%. This could be just a short-term bounce after their fairly steady declines of the last 18 months. Developed market stocks didn’t do as well. They traded within a tight range all week and finished the week clustered around a 0% return. Some of the indexes were fractionally above 0% while others were fractionally below. The top returner by a hair was the Dow 30, beating out the All-Country World Index with a return of about 0.2%.

It was not a good week for bonds of any kind. The best performers were investment-grade corporates with a loss of about 0.6%. Treasury Inflation-Protected Securities (TIPS) and high-yield bonds both lost about 1.1%. Long-term treasuries brought up the rear with a loss of 1.4%.

The dollar was up early in the week but declined for a weekly loss of about 0.7%. Among commodities, gold had the best week with a gain of about 0.8%. Other commodities lost money. Energy-based commodities lost 2%, while broad-based commodities lost 2.5%.

Some Reading for You

Here’s a solid, optimistic analysis of the recent housing market reports.

I added tax-exempt bonds to one of the portfolios recently. Here’s someone else explaining why that’s a good idea.

Breakfast is the most important meal of the day. Here’s why.

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

July 19, 2013 05:13 p.m.
Your Retirement Finance Week in Review

We need to follow the economic data carefully in the coming weeks. We were doing that earlier in the year when the fiscal contraction in Washington hit. The tax increases and reduced federal spending from the budget sequester had the potential to reduce economic growth. After a few months it was apparent that households adjusted well. Growth slowed a bit, but it still was positive and began to pick up in May and June.

But in May interest rates started to rise after Fed Chairman Ben Bernanke said that quantitative easing won’t last forever and the Fed might change policies in coming months. The question is: How will that affect household spending and the economy? Also, will it noticeably slow the recovery in housing? Another possible effect of rising interest rates is that investors reprice investment assets, reducing future investment returns. That would reduce the wealth effect that is so important to the Fed’s plans.

My expectation is that rates rose too much, too soon in May and June. While the Fed will reduce bond purchases, probably sometime later this year, it won’t raise short-term interest rates. The recent rise in rates will reduce economic growth at least a bit for a few months. We’ll have to watch the data to see if that is temporary, as happened earlier this year, or if households really pull back and reduce spending.

My expectation has been for positive but weak to average growth for the rest of 2013. The rise in rates increases the potential for growth to be weak or negative late in 2013. We’ll have to watch the data and monitor the sell signals on our investments as events unfold.

The Data

This was a fairly slow week for data. The most important information came from the Federal Reserve in the forms of its Beige Book and Ben Bernanke’s congressional testimony.

The important statements in Bernanke’s testimony were that the Fed will adjust monetary policy based on data. It doesn’t have a fixed schedule for withdrawing QE or raising interest rates. Changes also will come in stages. First, the Fed will reduce the amount of bonds it purchases each month. It probably won’t sell any bonds. Only after a long series of such moves, when the economy is healthy or inflation is rising, will it raise short-term rates. Bernanke also said the economy is weak, so accommodative Fed policies will be needed for some time.

The Beige Book indicated the economy continues to growth moderately to modestly. The economy is growing across the country and industries, though production is weaker than other sectors. Consumer spending and confidence increased at a higher rate in recent months. Overall business conditions aren’t as positive as retail sales and housing, but there was no sign yet of a slowdown from higher interest rates. Inflation remains below the Fed’s target rate.

In the week’s data releases, probably the most interesting was retail sales. While the 0.4% growth rate was relatively healthy, it was slightly below last month’s rate and below expectations. Even worse, after autos are subtracted sales growth was flat and after autos and gas are subtracted, growth was slightly negative. Retail sales are volatile from month to month, but this could be the first sign of interest rates affecting household demand. We’ll have to watch sharply.

There was three reports on manufacturing, and they were very positive. The Empire State Manufacturing Survey, which has lagged in recent months, had healthy growth that exceeded expectations. The Philadelphia Fed survey had an even sharper increase. Industrial Production rose slightly above expectations and well above last month’s flat reading. So, it appears that manufacturing is starting to recover from its stall earlier in the year.

The Housing Market Index from the National Association of Home Builders rose sharply and reached its highest level since 2006. The increase the last few months is very sharp. The latest increase occurred despite the recent increase in interest rates. That could mean some potential buyers are rushing to lock in rates, bringing future months’ activity forward, or it could be simply a continuation of the recent growth.

Also in housing, on the other hand, saw a sharp decline from expectations and last month’s number. This might not be a sign of economic change. Multifamily housing (apartments) was a main reason for the decline. Those starts are volatile, and they aren’t a sign of strength of weakness in the single-family market.

New unemployment claims dropped sharply, bringing them back to the range they were in before last month’s sharp increase.

The Leading Economic Indicators from the Conference Board was flat for the month. That generally was caused by the drop in housing starts. If they grow against next month, the LEI should increase unless there’s a big drop in the stock market.

The Markets

In the markets, bonds continued a comeback from the May-June decline. Long-term treasury bonds had a volatile week but close with a gain of about 0.8%, recovering on Friday from a sharp drop on Thursday. Investment-grade corporate bonds had the same return without the wild ride. Treasury Inflation-Protected Securities rose sharply from their recent low, clocking a 1.3% return or the week. High-yield bonds did even better, rising 1.4%. The dollar lost about 0.6% in a fairly volatile week for the currency.

Stocks generally had a volatile week without much net change. Small company U.S. stocks did best, with the Russell 2000 rising 1.1%. The All-Country World Index was next with a 0.8% gain. The S&P 500 was close behind at a 0.7% gain while the Dow 30 lagged with a 0.4% gain. The worst performer was emerging market equities with a 0.2% loss. The emerging markets were the leaders by Wednesday but declined sharply after new data and policies were announced by China. Emerging markets had been making a company the last few weeks from their sharp decline of the last year or so, but reversed course at least for this week.

Commodities had a good week. Broad-based commodities led the way with a 1.8% gain. There were sharp increases in a number of commodities, including rice, soybean meal, orange juice, and cotton. Energy was close behind with a 1.4% gain. What’s interesting about energy is that for several years there was a wide gap between the prices of west Texas crude and Brent crude, largely because of transportation problems from the U.S. Midwest that affected shipments and delivery of the west Texas crude. Those problems largely are resolved, and the price gap is closing. With global economic growth being weak, recent increases in energy prices are largely tied to Middle East politics and other factors. Gold had a good week, rising almost 0.8%, though it was down as much as 0.8% at one point.

Some Reading for You

Despite all the hoopla about growth in China the last few decades, not many people outside China are profiting from it, according to this.

Did real estate appraisers contribute to the housing crisis? Consider this.

Is bringing back Glass-Steagall a good idea? This post thinks not.

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

July 12, 2013 05:00 p.m.
Your Retirement Finance Week in Review

The big news the last two weeks unfortunately was Ben Bernanke. I say unfortunately because the Federal Reserve shouldn’t be this much of a consideration for investors, businesses, or the economy. Investors panicked in May and June when Bernanke stated the obvious, that the Fed’s bond buying won’t continue forever. Then, investors became more optimistic this week when Bernanke mentioned after a speech that the economy still is fairly weak, that it needs continuing stimulus, and it could need more monetary stimulus if the data turn negative.

Here are a few points people should keep in mind. The Fed’s policies are not on a calendar schedule. Increases or decreases in bond buying will depend on economic data, not on anything else. Also, there’s a big difference between reducing bond buying and raising interest rates. There’s also a big difference between reducing stimulus and reducing the supply of credit or money. When the Fed decides to reduce stimulus by reducing bond buying, it still won’t increase short-term interest rates or try to sell its bonds and mortgages into the market. Raising interest rates won’t occur until a considerably time after bond buying stops, unless economic recovery really accelerates.

The May-June panic provided some opportunities for investors, because some investments became oversold. I’ll be presenting some of those opportunities in the August issue of Retirement Watch, which will be posted on the web site next week.

The Data

The big reports of the last two weeks were on the job market. They major reports showed no change in the labor market. The economy is creating a decent number of jobs, 195,000 per month in the report released July 5. The trend for the last few months shows a fairly consistent increase of 200,000 jobs per month.

The news isn’t all good. Most of the jobs created are in relatively low wage industries: hospitality, retail, restaurants, and health care. Though there was a nice bump in hourly wages in the latest report, the reports for the last few months have been flat in wage gains. Also, the number of hours worked isn’t increasing much. This week the JOLTS (Job Openings and Labor Turnover Survey) from the Department of Labor was released. It showed that while employers are hiring at a decent rate, there are few firings and few people voluntarily leaving jobs. That leaves little room for the many unemployed people to find new jobs. The new unemployment claims report also showed stability with a small decline to 343,000 last week and an increase to 360,000 this week.

In short, the labor reports indicate the economy will continue to grow at a modest rate. Household demand for goods and services will rise gradually, and businesses will increase their supply to match that.

The Small Business Optimism Index declined modestly after two months of increases. This is important, because small businesses haven’t recovered much since 2009. Most of the improvement has been in large businesses that benefit from stimulus programs and exports. We can take this month’s decline as not significant because it was only a small decline. But if it is sustained, that’s a problem for the economy.

The manufacturing data of the last two weeks all indicate that manufacturing improved modestly after slowing for most of 2013. This includes the PMI Manufacturing Index, ISM Manufacturing Index, and Factory Orders. Manufacturers seem to have adjusted to the reduced demand from overseas and are increasing their production in line with the steady increase in household incomes and employment.

 Inflation as measured by the Producer Price Index was higher than expectations at 0.8% for June. That was due mostly to food and energy increases. When those are excluded, the 0.2% core increase was in line with expectations. Yet, this number bears watching, because if inflation increases above expectations the Fed will have to curtail its bond buying.

Consumer confidence as measured by the University of Michigan declined marginally. The measure remains near its post-2008 high, but this also bears watching. A sustained decline in consumer confidence usually foreshadows a decline in household demand and potentially economic contractions.

The Markets

The mending from the May-June panic continues. Long-term treasury bonds continued to decline last week but had a modest increase this week. High-yield bonds on the other hand had good gains both weeks for a total gain of over 2% for the two weeks. Investment-grade bonds fell last week but modestly and gained enough this week to net a slightly positive gain for two weeks. The dollar declined until Friday, registering a net loss of about 2.5% for the two weeks.

Stocks other than emerging market stocks didn’t suffer as much as bonds during May and June and have been rising steadily in July. Small company U.S. stocks have done best with a 4.5% gain for two weeks. The S&P 500, Dow 30, and All-Country World Index all finished with gains around 4%, with the ACWI surging on Friday to surpass the other two. Emerging market equities also finished with a gain of about 4% for the two weeks, but their path wasn’t smooth. Their returns were negative until a sharp increase on Friday.

Commodities had positive returns but over very different paths for the different commodities. Energy-based commodities rose steadily for a 4% two-week gain. Their performance probably is due to Mideast politics as much as anything else. Broader-based commodities were flat last week but increased steadily this week for a 2.5% two-week return. Gold was down last week, rose gradually most of this week until surging Friday for a 3.5% return.

Some Reading for You

I like to follow the research on happiness, and this slideshow summarizes some of the key points.

Did you hear about the inner game of investing? Read this article and then my blog post on it.

If you want to keep your brain young and need to separate the myths from the facts, take a look here.

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