June 2012
June 29, 2012 04:30 p.m.
Your Retirement Finance Week in Review
European leaders delivered a pleasant surprise to the financial world by agreeing to a couple of things at their latest summit. But don’t get too excited by the developments. Afterwards the leaders didn’t seem to agree on what they’d done, and the developments still don’t resolve the key issues.
One thing not captured by the published economic data is the capital flight out of Europe. Initially capital was fleeing primarily Greece in favor of other European countries. More recently, capital flight’s been widespread as investors worry about the fate of the euro itself and seek safer currencies. The Swiss franc and the U.S. dollar are the main beneficiaries. There are two factors to watch to see if this improves. One is interest rates in Europe. If they stay high or rise, and especially if the spread between the indebted country rates and other rates increases, that’s a bad sign. Another bad sign is if the euro continues to lose value against the Swiss franc and the dollar, especially the franc.
The key question that hasn’t been answered yet is: Who will cover the losses? The expectation is that Germany eventually will have to, because it is the only country left that might be able to. But Germany’s been clear that it won’t put up any additional capital without broader fiscal union in addition to monetary union. That would mean the other countries essentially would have to let Germany control their taxes and spending. Until those things happen, any solutions out of Europe are short-term and don’t attack the real problems. One of the measures announced this week was a step in that direction. He gave the European Central Bank a stronger role in supervising all of Europe’s banks. But the details haven’t been worked out yet. Here’s how The Wall Street Journal concluded its article on the developments:
“The details about liability … still have to be negotiated individually, and I can predict now that they will be quite difficult negotiations because we are in a new area, and for that reason it won’t just take only 10 days,” Ms. Merkel told a press conference.
The leaders have given their finance ministers only 10 days to adopt the basic steps for implementing their decisions, but in a clear signal that direct bank aid may not be available until 2013, euro-zone leaders gave member states until the end of the year to agree on the issue of banking supervision.
Some immediately sensed a risk of the kind of implementation gap that has dogged the euro-zone’s crisis strategy since 2010.
“We have an agreement in principle but the devil could lie in the details,” one senior euro zone official said. “The unanimity that Germany wants could be a big sticking point.”
The Data
It was a fairly quiet week for data, but some of it did move markets.
New home sales rose more than expected and continued several months of increases. But there are a couple of cautions in the data. One is that prices of new homes haven’t moved, and it seems builders are using price concessions and incentives to spur sales. Also, even at the current level of 369,000 in monthly sales (the highest in two years), sales are well below the 1.4 million at the peak.
There was more decent housing data. The Case-Shiller Home Price Index rose more than expected for the month and brought the 12-month price decline to only 1.9%. Pending sales of existing homes also rose by 5.9% for the month. There are two reasons to be cautious about this data. One is that the foreclosure scandal of late 2011 stalled the foreclosure process for a while, and that prevented a lot of new inventory from coming on the market this spring. That shadow inventory is likely to be coming on the market in coming months and keep coming at least through 2013. The other reason is that the percentage of people who can qualify for mortgages at today’s standards and put together the minimum down payment is fairly low. This was apparently in the mortgage application data, which showed a 7.1% decline despite very low mortgage rates.
The manufacturing data for the week was mixed. The Dallas Fed Manufacturing Survey rose and was above expectations. That’s important, because Texas is the second largest manufacturing state. Most measures of the index rose. This contrasts with the Richmond Fed Manufacturing Index, which declined significantly and was below expectations, and the Kansas City Fed Manufacturing Index, which was modestly positive but below expectations and last month’s report. Durable Goods Orders showed a strong bounce above last month and above expectations. After excluding transportation (which contain the very volatile aircraft orders), however, the increase was less impressive and below expectations. Overall, the manufacturing data continue to indicate slow growth that probably is decelerating. The question is whether it will continue to decelerate or find a bottom at current levels.
The Chicago Purchasing Managers Index was below consensus, and the new orders component was he weakest since September 2009. Consumer confidence as reported by the Conference Board declined and has been in a fairly steady decline since last September. Consumers continue to be more pessimistic about the future. Likewise, Consumer Sentiment as measured by the University of Michigan declined and is nearing the lows of 2012. The third and final report of first quarter GDP came in unchanged at 1.9%. New unemployment claims declined modestly to 386,000, but the previous week was revised higher by 5,000. That’s keeping the four-week moving average above 385,000.
The Personal Income and Outlays report was interesting. Personal income rose modestly, but spending was flat. This ends a number of months when spending rose faster than income as consumers were willing to reduce savings and take on credit card debt to spend. The good news was that in response to declining energy prices consumer prices, both core and headline, as measured by the PCE deflator rose modestly. The one year price index increase was down to 1.5%, from 1.9% the previous month.
The data don’t change the picture of the economy. It’s growing slowly, below 2% annually, and the growth might be slowing. There are no signs the labor market is improving, and few other aspects of the economy are likely to improve without more jobs and higher incomes. There’s the potential the economy could slip into a recession because of the drags on growth.
The Markets
This week’s market action was distorted by the large gains in risky assets on Friday following the announcements from the European leaders’ summit. Before that, there wasn’t much going on. Through Wednesday, there were good gains in commodities (other than gold) and emerging markets. Everything else was flat.
The big losers on Friday were safe assets: long-term treasury bonds and the dollar. Each lose about 1% for the week.
The biggest winners were commodity-related. Energy commodities rose about 6.5%; emerging market stocks rose about 5.5%; and broad-based commodities rose about 5%.
The next highest return was for small U.S. company stocks, rising 4.5%. Global stocks, as measured by the all-country world index, rose 4%. The S&P 500 rose about 3.25% for the week. The Dow was right behind, rising 3%.
High-yield bonds and gold rose a little under 2%. Investment-grade corporate bonds rose about 0.5%
Some Reading for You
There was a good summary of how to decide about purchasing long-term care insurance here. It doesn’t cover everything we cover in Retirement Watch, but it’s a good way to organize your thoughts.
Quantitative easing is becoming less effective and having more negative effects each time. For proof, take a look at these charts.
Morningstar recently held its mutual fund conference for investment advisors. You can read the articles on its web site reporting the conference here.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
June 22, 2012 04:50 p.m.
Your Retirement Finance Week in Review
Not that you needed another reason to hate Goldman Sachs, but the former investment bank provided one Thursday. Its market strategists issued a report recommending that investors short stocks, anticipating a drop of about 5% in the S&P 500. The recommendation combined with a slew of other events and news Thursday to make stocks tumble. Major stock indexes lost 2% and more on Thursday. There was negative economic news from every region of the globe this week. There’s clearly a global economic slowdown.
Investors were anticipating major actions from central banks in the last week and were disappointed. In the U.S., the Fed merely said it would extend Operation Twist through the end of the year. Central banks in the U.K., Europe, and China also took more modest actions than investors hoped.
My view is that central bankers realize the effectiveness of their actions is waning, and they need to save their tools for crisis situations. They also want to put pressure on politicians to take real action instead of expecting to get by on half measures and central bank support.
The sharp stock decline was unusual, because there wasn’t much economic data in the U.S. Its clear the rally of early June occurred because investors were hoping the Fed would step in to shore up the stock market. But as I’ve indicated, the Fed doesn’t like to act within six months of an election. Also, its actions since 2008 have occurred only after sharp drops in both stocks and the economy and likely after one or more large banks were having problems. Modest drops in stocks and growth won’t trigger Fed action.
The investor disappointment spread to almost all markets. Commodities, including gold, declined.
We’re in a perilous time for the global economy and markets. European policymakers have few policy options, as documented in the posts I made recently in my public blog. They delayed action for over two years and now are in a box. The risk of a real financial contagion from major European bank failures or a failure of the euro isn’t yet 50%, but it’s no longer a remote probability. Investors need to be cautious, balanced, and prepared for a range of possible outcomes.
The Data
It was a modest week for U.S. economic data, with most of it packed into Thursday.
There were several reports on the housing market, which mostly poured cold water on those who were optimistic that the bottom had been reached and housing is in a recovery. The home builders Housing Market Index was strong again. But analysts point out that this measure of foot traffic and interest in new homes isn’t translating into substantial sales increases. The housing starts data was confusing. Last month’s number was revised down. This month’s number was below expectations and last months’ initial number but matched last month’s revised number. But new housing permit increased significantly, indicating starts are likely to increase in the next month or so. Existing home sales were below last month’s number and expectations. They still show a little less than 10% growth over a year ago, but the momentum of recent months slowed. New mortgage applications also declined, halting an extended period of rising applications.
We’re still scraping along the bottom of the residential real estate market. Month to month conditions are uneven, and there’s the potential for another price decrease of 10% or so if there’s another recession or significant economic slowdown. It’s also clear that the unseasonable warm winter pulled some activity from the spring into the winter months, raising false hopes about the strength of the market.
New unemployment claims were slightly less than last week. But they were higher than expectations and still are above 380,000. Many analysts thought we would no longer visit numbers significantly above 350,000 a few months ago and have been disappointed for about two months now. It is clear there isn’t a significant improvement in the labor market.
The Philadelphia Manufacturing Index joined a line of recent data showing a slowdown in manufacturing. The number was negative for the second month in a row and by a greater rate than last month. It also was well below expectations. The only positive factor in the report was that price pressures are reduced, because of declining oil prices.
The Purchasing Managers Index flash report also showed less growth than expected but still some level of growth. Areas of concern in the report were fewer export orders and a reduction in backlogged orders.
A positive report for the week was the Leading Economic Indicators. It rose after last month’s decline and exceeded expectations. Overall the report reflects continued slow growth.
Economic growth clearly is slower than in the first few months of the year. Part of that is due to the effects from the relatively warm winter compacting some activity in the earlier months. But part also is due to reduced stimulus, headwinds from Europe and China, and the inability of the economy to establish sustainable growth without stimulus. Uncertainty about Europe, China, and fiscal policy in the U.S. combine to keep businesses and investors from having enough confidence to make long-term investments.
The Markets
There weren’t too many investments with positive returns for the week. Thursday was the turning point. About half the investments I track weekly were positive or even for the week at Wednesday’s close. Thursday’s action changed the week for most investments.
The big loser for the week, in a surprise to many people, was gold. It declined almost 3% for the week. Closely following it were other commodity-based investments. Energy-related commodities fell a little more than 3% after being up about 1.5% through Tuesday. Emerging market stocks were 2.5% higher on Tuesday but finished the week down about 2.5%. I attribute the decline of these investments to two factors. One factor is the potential for global deflation thanks to the credit and growth contractions potentially stemming from the European situation. The other factor is the continued negative economic information from China. China has been the leading purchaser of commodities since 2009 and greatly distorted the markets.
There were few winners for the week. Surprisingly, the biggest winner was high-yield bonds with an increase of 1%. I attribute this partly to the fact that high-yield bonds declined in recent weeks while stocks were climbing. Also, the desperate search for yield by investors seems to keep a floor on high-yield bonds. The dollar was the next best investment. It declined early in the week but recovered for about a 0.75% gain against a basket of major trading partner currencies. Investment-grade bonds finished the week about even.
Long-term treasury bonds fell sharply early in the week. I think that was partly a response to their being overbought recently after several weeks of sustained increases. Their decline also was due to expectations that the Fed would announce easier monetary policy. The bonds gained some on Wednesday and Thursday but fell again on Friday to finish the week with about a 1.75% loss.
Stocks generated a lot of headlines for the week. The All-Country World Index of global stocks declined about 1.25%, so it was a global decline this week. The Dow Jones Industrial Index and S&P 500 had a bumpy week and finished with declines of less than 1% after being up over 1% early in the week. The big surprise were small company U.S. stocks as measured by the Russell 2000. They were up almost 2.5% early in the week and recovered more on Friday than the other indexes. The result was a gain of 1% for the week.
Some Reading for You
On the public blog this week I posted a couple of items, one from John Hussman and one from John Makin, arguing that Europe has few options left and leaders need to move quickly if they want to avoid a disaster. I recommend you locate those items on the blog and click through to the main articles.
Barron’s recently anointed Robert Kessler as the real bond king. He recently appeared on CNBC to defend investing in long-term treasuries now. You can view that here.
Over the last few weeks on the blog I’ve linked to a few articles that show how ETFs don’t always work as investors expect. Here’s a sample from the last week that should be eye-opening.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
June 15, 2012 05:50 p.m.
Your Retirement Finance Week in Review
This will be an important weekend for markets and investors. There will be an election in Greece, and much market reaction is likely to flow from those results. If extremists win and put the bailout deals in jeopardy, markets are likely to decline significantly on Monday. Central bankers already are issuing statements that they’re prepared to provide liquidity to banks in case of a need. If the election results in some coalition that is likely to continue cooperating with Europe’s policymakers, markets could rally on Monday. I wouldn’t want to bet on a particular outcome. Instead, maintain a balanced portfolio now and wait for events to dictate a change.
It’s clear markets aren’t reacting to fundamentals. For the last few weeks, markets have moved based on political and central bank statements, rumors, and expectations of actions by elected officials and central bankers.
There are reasons to be optimistic long term. Recent elections show American voters are ready to make tough choices. Events in Europe indicate Germany finally realizes it will have to be the one to absorb a lot of the losses if the euro is to survive, though it plans to stretch out the process as long as possible. In the short-term, however, the system is at risk of one or more shocks.
The Data
The data for the week was predominantly negative in the U.S. First, over the weekend China released a batch of recent data. It showed China’s economy slowed in recent months and slowed faster than many analysts expected. China preceded the economy with some interest rate cuts on Friday. But China’s recent stimulus measures have been much more modest than it took in 2008. Those strong 2008 measures boosted China’s economy but they also caused problems that China’s now trying to unwind. So, it’s unlikely China will take such strong measures this time.
In the U.S., the National Federation of Independent Business issued a mixed Small Business Optimism Index. There were slight improvements in plans to hire workers and increase compensation. But there were declines in expectations of future sales and capital expenditures. The net was a slight decline, with no signs of an expectation for increased economic activity.
Retail sales declined, but were in line with expectations. Part of the decline was due simply to lower gasoline prices. Even after excluding gasoline sales, however, retail sales declined for the month. It’s clear that warm weather pulled some sales into the winter months and caused people to be more optimistic about the economy than was warranted. What isn’t clear is the extent to which that caused the recent decline in retail sales and to what extent it is a reduction in economic growth.
Lower gas prices also caused a whiff of deflation. Both Producer Prices and Consumer Prices reported declines over the last month. The decline in the PPI was less than expectations, while the decline in the CPI was slightly more than expectations. Excluding food and energy, the CPI rose 0.2% and has increased 2.3% for the last 12 months. That means even after the recent decline the core inflation rate is higher than the Fed’s target and could make some at the Fed hesitant to inject new stimulus absent a crisis or clearly negative growth in the economy.
The recent drop in interest rates spurred new mortgage activity. Mortgage applications boomed in the last week. Unlike in recent data, home purchase applications increased along with refinancing applications. There appears to be some demand for homes at current prices and interest rates.
New unemployment claims disappointed analysts again. They turned up to 386,000, and last week’s number was revised higher. The four-week moving average now has turned upward for several weeks. That indicates the jobless rate and number of unemployed isn’t likely to decline soon.
I don’t usually discuss the Fed’s Balance Sheet report in these e-mails, but the recent trend is worth noting. The assets on the balance sheet have been declining for several months, ahead of the end of Operation Twist. This is a sign of a contractionary monetary policy, not an expansion. It also coincides with the slowing in economic data.
Consumer sentiment declined significantly after rising each month in 2012. It came in at the lowest level of 2012. The report showed declined in assessments of both current conditions and expectations.
Friday revealed new weakness in manufacturing. This is important because manufacturing’s been a major part of the growth since 2009. Industrial Production declined and was below expectations. Capacity utilization dropped a small amount. The Empire State Manufacturing Survey also showed a lower rate of growth and was below expectations.
The conclusion from the data is an economy that’s still growing, but growing slowly, and the rate of growth is slowing. The economy also is slowing faster than expectations. The data isn’t consistent with a recent bounce in equity prices. Some investors are buying stocks now on the expectation that central banks will take action soon to stimulate the economy
The Markets
Gold was the big winner for the week with a gain of about 2.75%. Its gain was partly a bounce off short-term oversold lows. Gold’s rise also was caused by investor expectations that central banks will resume money printing again. Other commodities had a decent week but not as good. Broad-based commodities finished the week about even, recovering from sharp drops early in the week. Energy commodities trailed a bit, suffering a loss just under 1% for the week.
There was a mixed week for stocks. Emerging market stocks tumbled Monday but had strong gains the rest of the week. They closed with a 2.75% gain for the week. U.S. stocks trailed and had diverse returns. The Dow did best, finishing with about a 1.25% gain for the week. The S&P 500 fell sharply Monday and struggled back to close the week with a gain of about 0.75%. Small company stocks, as measured by the Russell 2000, had more difficulty recovering from Monday’s decline and barely closed the week with a gain.
Long-term treasury bonds had an extremely volatile week, spiking down on Tuesday and spiking up on Friday. They ended with a gain of about 1%. The dollar had a bad week, declining about 1%, apparently on the expectation that the Fed would begin pumping up the money supply soon. That also was big help to international bonds. High-yield bonds and investment-grade bonds recovered from recent losses, with high yield closing the week about 0.75% higher and investment-grade gaining about 0.25%.
Some Reading for You
The bailout of Spain’s banks might be a new template for the European debt crisis. It could show that Germany realizes it is the only country that can keep the euro intact and that it’s willing to do that, albeit at a very slow pace. Read the essay by George Friedman of Stratfor.
Exchange-traded funds are full of surprises. Many investors still aren’t aware of their nuances and how they can differ from index funds. This article reviews some key lessons from recent market action.
The failure of MF Global shook up markets and investors in October 2011. Most investors still don’t know what happened. This article from Fortune provides more details than you’ve had before, but it doesn’t answer some key questions about missing money.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
June 8, 2012 05:50 p.m.
Your Retirement Finance Week in Review
This week was clear evidence that the economy and markets are in the hands of central bankers and politicians. Markets moved all over the place without real economic news. Instead, they moved on rumors and hopes about what the central bankers and politicians might do.
It’s clear that the problems in Europe and the potential for a financial meltdown are keeping a lid on global growth and investment markets. Some investors are betting that these things will be resolved and buying assets whenever they decline. That’s a risky bet. The politicians avoided taking any substantive actions so far and allowed the problems to become worse.
Many market participants want another round of quantitative easing to boost the markets. But they should consider that each round of QE is less effective on the economy and stocks than the previous one. Yet, commodity prices rise more each time. As Randall Forsyth wrote in Barrons.com this week: “QE1 in 2009 sent the S&P 500 soaring 70% and emerging-markets stocks up a sizzling 120%. Commodities rallied 46% while gold gained 44% in that round. QE2 in 2010-11 was less potent spurring equities, with the S&P 500 up 33% and EM stocks up 41%, but was even more intoxicating to commodities and gold, up 50% and 64%, respectively.”
There’s supposed to be a big announcement from European leaders on Saturday afternoon that would outline a bailout of Spain’s banks. As with past announcements, this is likely to delay real action rather than be a solution. Europe has a full agenda in coming months, including several important elections, a summit of financial leaders and more. Whatever happens this year, it is merely one in a long line of events. I recommend staying diversified and cautious rather than betting on a particular outcome.
The Data
The U.S. clearly has moved from an expansion phase of the economic cycle to at least a pause. The issue for investors is whether this is merely a pause or is a peak that will roll over into a contraction. Barring monetary stimulus or fiscal reform economic growth is likely to slow as 2012 continues and likely contract at some point. The data was light this week. Let’s take a look at it.
The Fed’s Beige Book didn’t have any surprises. It concluded the economy was growing at a moderate pace with manufacturing expanding in most of the country. There was some improvement in real estate activities. It also appears that warm winter weather moved some sales and other economic activities from the spring into the winter months. In short, there wasn’t anything in the book to trigger a change in Fed policy.
Factory orders were a notable disappointment. They were below expectations and contracted rather than growing. In addition, the prior month’s number was revised downward. It was the third consecutive monthly decline. Manufacturing’s been a strong point in the economy since 2009, so weakness there is bad news.
One reason for weakness in manufacturing is slowing growth overseas. We saw that in the international trade report on Friday. The trade gap declined, but both imports and exports declined. The trade gap declined because imports fell more than imports. The report shows demand is declining worldwide.
The ISM Non-manufacturing was a bit better with a modest increase that was slightly above expectations. The positive in the report was strong growth in new orders. The negative was weak exports, especially to Europe and China.
Productivity continued to decline, and the decrease was slightly more than expectations. A good sign for businesses in the report but not necessarily for the economy is that unit labor costs declined. The combination is not a good mix for future corporate profit margins. Output growth declined in the report. Businesses will need to increase output without letting labor costs increase if they hope to maintain recent profit margins.
New unemployment claims were a modest improvement and a little better than expectations. The four-week moving average rose because of the increases in
