June 2013
June 27, 2013 04:45 p.m.
Your Retirement Finance Week in Review
I hope each of you has a good July 4th. Because of the light schedule in the market and economic data next week, I probably won’t issue a report unless there is a significant surprise. If all goes according to plan, I’ll be back in two weeks.
Federal Reserve officials are taking to the media these days to tell you what I’ve been saying for more than a month: Investors overreacted to Ben Bernanke’s recent statements. The Fed isn’t going to raise interest rates or even trim quantitative easing to a significant extent any time soon. He was just laying out the long-term plan to reverse the “extraordinary measures” the Fed’s been using since 2009. The liquidation panic that the original pronouncements caused seems to be over, with some nice recoveries in many types of bonds the last few days. There likely will be some weeks of volatility, and then a nice recovery in financial assets.
The U.S. economy is doing fairly well. Despite the tax increases. Despite the federal sequester. Despite the problems in China and other emerging markets. Despite the recession in Europe. Despite the Fed’s recent talk about tightening monetary policy and the ensuing rise in interest rates. That’s the conclusion from the recent data.
Growth is not robust enough for the Fed to trim monetary easing by much or to justify much higher market interest rates. In fact, the main concern is not inflation and an over-heated economy. The main concern at this point is deflation and a stall in growth. While the economy adjusted well to the fiscal tightening earlier this year, growth will be trimmed if the recent rise in interest rates and decline in stock prices are maintained or become worse.
I’m looking for opportunities to buy things with the cash that was generated by recent asset sales. Don’t consider the recent turmoil as a reason to hunker down in cash indefinitely.
The Data
There was a lot of data this week.
The manufacturing data was mixed, but more positive than negative. The Dallas and Richmond Federal Reserve Banks showed strong improvement in their manufacturing surveys. Most of the Fed banks also had positive reports this month, reversing previous months of negative data. The Kansas City Fed was something of an outlier, reporting a modest decline. But even that report showed an improvement in expectations for growth in the coming months.
Durable Goods Orders also was positive for the month, even after subtracting the volatile aircraft segment. The strength was broad-based and moderate. The Chicago PMI also indicated growth, but at a slower rate than last month. All areas of the report were positive, though not nearly as strong as last month.
Housing also had a pile of positive reports this week. The Case-Shiller Home Price Index had another strong monthly increase, and the annual rate of price increases was 12.1%. The FHFA House Price Index also had a strong gain, though as usual not as strong as Case-Shiller. FHFA recorded a 7.4% annual increase. New Home sales also recorded a strong increase, following last week’s increase in existing home sales. With fewer foreclosures for sale on the market, new homes sales are more competitive. The only negative is the price declined by 3.2%, but that was after a strong increase the previous month. Pending home sales also increase sharply. The index is at its highest level since 2006.
We’ll have to see if the recent increase in mortgage interest rates slows housing activity, but history shows it generally doesn’t as long as economic growth continues and the rate increases aren’t too sharp.
Broad-based data showed unsurprising declines in the first quarter. That quarter is already behind us, and we knew at the data growth was slowing from the hot rate of the fourth quarter of 2012. GDP for the first quarter was revised down in the third and final report. Growth still was positive at 1.8%, but was less than the initial report of 2.4%. Corporate profits also declined from the first quarter. The 12-month increase was only 4.7% compared to the 13.3% climb at the end of the fourth quarter of 2012.
Personal income increased a healthy 0.5%, well above expectations and last month’s modest increase. Consumer spending also increased after declining last month. This showed households have adjusted well to the fiscal tightening. The report also supported what I’ve been saying that deflation is more of a risk than inflation. The PCE Price Index was only 1.0%, well below the Fed’s 2% or higher target.
The optimistic picture of households is supported by the consumer sentiment measures. Consumer confidence as reported by the Conference Board increased sharply and is solidly at a high in the recovery. Consumer sentiment as measured by the University of Michigan had a very slight decrease from May, indicating sentiment essentially was stable and is near the recovery high of last month.
New unemployment claims remain within their range of recent months, coming in at 346,000 and recovering from last week’s increase to 355,000.
The Markets
This was a recovery week for bond markets, after being hammered most of May and June.
Long-term treasury bonds lagged, gaining 2%. Investment-grade corporate bonds gained slightly more. High-yield bonds gained about 2.25%, though they were up 3.5% at one point on Thursday. Treasury Inflation-Protected Securities (TIPS) gained 2.5% for the week. The dollar had a modest gain of about 0.75%.
Stock markets also had a good week. Emerging market stocks, the worst performers in most recent periods, surged ahead by 6.5%, finishing the week on its high point. Most other indexes turned down at the end of Friday and so didn’t finish at their highs. The Russell 2000 index of U.S. small company stocks did next best, increasing 3%. The S&P 500 rose 2.5%. The Dow 30 and All-Country World Index each rose about 2%.
Commodities, especially gold, continue to struggle, revealing the global deflationary trend that central banks are fighting. Gold lost 4% for the week, though it was down over 7% at one point on Thursday. Broad-based commodities lost about 1.75%. Energy-based commodities squeaked out a gain of about 0.75%.
Some Reading for You
I thought this was a fascinating look at a get-rich-through-real-estate seminar company.
There are a lot of pessimists out there. Here’s a quick read on why you shouldn’t be a pessimist about the economy and markets.
Worried that higher interest rates will kill the housing recovery? Read this.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
June 21, 2013 05:00 p.m.
Your Retirement Finance Week in Review
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Many investors are getting what they wanted. The stock market rally since late 2012 surprised many people. A large number of investors have been on the sidelines and missed most of the rally since the 2009 bottom. As the market indexes climbed in early 2013 they said they were waiting for a correction and a good entry point. It looks like that is coming.
I said before that I believe investors are overreacting to Ben Bernanke’s recent statements. He only repeated what he’s said in the past. The Fed will adjust its monthly bond purchases depending on the economic data. Right now the data isn’t good enough to justify reduced monthly bond purchases, but that could change in a few months. The Fed won’t sell existing bond holdings. It will raise interest rates only long after the bond purchases have stopped and the economy shows it is able to grow on its own or inflation is a worry.
Sometimes I think Bernanke deliberately changed his phrasing in May and earlier this week to inject some volatility into markets and stop investors from thinking quantitative easing makes stock investing easy.
The overall data indicate that the fiscal tightening that began in 2013 reduced economic growth a bit. The economy still is growing, but it’s in that rough patch I anticipated at the start of the year. The data also indicate inflation is well below the Fed’s targets and any near-term risk is of a deflation rather than higher inflation.
My expectation, and it appears to be the Fed’s also, is households and businesses will adjust to the fiscal tightening sometime during the summer. Then, economic growth will pick up again later in the year and into 2014.
If this expectation is wrong, then the Fed will increase bond purchases again. If the expectation is close to accurate, then stocks and bonds probably will recover their recent losses.
Several of our sell signals were triggered in this sell off. The most recent were Cohen & Steers Realty Shares and PIMCO All Asset All Authority. Wintergreen and MainStay Marketfield are holding up well. Put the sale proceeds from CSRSX and PAUDX in money market funds for now. I’m looking for re-entry points into the markets and the best vehicles to add to the portfolios after this correction.
The Data
There wasn’t a lot of data this week. Most of the market-moving information this week was from Ben Bernanke and the Fed.
China issued its usual monthly batch of data this week. This showed growth fell again, which is deliberate policy. The recent data from China also show way too much debt. The government is trying to reduce this, and one way it is doing that is by this week’s announcement that it essentially won’t be bailing out certain lenders in what’s called the interbank market. While that panicked some investors who were looking for a bailout and more stimulus, it’s probably a good long-term policy.
In the U.S., there was a lot of housing data, and it was positive. Existing home sales rose sharply, as did sale prices. Lack of inventory was big reason for the price increases, and signs are that inventory is beginning to increase. Another good sign is that the percentage of foreclosed and distressed sales are declining. There still are a fair number of all-cash investor buyers, but that will decline as prices increase.
The Housing Market Index compiled by the National Association of Home Builders had the largest monthly increase since 2002 and is at the highest level since 2006. That indicates the new home market also is improving and is a positive force for economic growth. In line with that home starts, increased, though lower than expectations. Also, a big part of that increase was in apartments.
Things seem to be improving in manufacturing. Both the Philadelphia Fed and Empire State Manufacturing Survey had strong increases. But a confusing nature of these reports is that the headline numbers primarily reflect some optimism about the future from survey respondents. Details in the surveys about actual current conditions, such as new orders, backlogs, and hiring plans, weren’t nearly as positive. In fact, the detail of the Empire State survey were mostly negative. Even so, it appears manufacturers have some reason to expect improvements.
Likewise, the PMI Manufacturing Index Flash report for the mid-month was modestly positive. Coming in just above 50, it indicates growth but not strong growth. The Index of Leading Economic Indicators also rose just a fraction.
Inflation remains restrained, perhaps too restrained for the Fed. The monthly change was only 0.1%, and the year to year increase in the CPI was 1.4%. Most of the restraint in the CPI is due to a slowdown in medical expense increases.
New unemployment claims had a sharp jump for the week. Most economists look at the four-week moving average, because week-to-week the numbers are volatile. We’ll have to wait to see if this is a new trend, but it is consistent with my view that the labor market is improving but not at a rapid rate. High unemployment and low wage increases will be with us for a while.
The Markets
It’s hard to find anything positive in the markets this week. Clearly investors were shifting their portfolios. I suspect most of the action is due to leveraged investors unwinding their trades, either as a matter of policy or because of margin calls.
Let’s start with bonds, since they’ve been leading the downturn based on the announcements from the Fed. Long-term treasury bonds continue to get crushed. They lost another 5% this week, with most of that beginning Wednesday afternoon after Ben Bernanke started talking. Following close behind were investment-grade corporate bonds with a loss of over 4%. Treasury Inflation-Protected Securities (TIPS) lost about 3.5%, while high-yield bonds lost just over 3%.
The dollar meanwhile was the week’s big gainer with a 2% rise.
Stocks also did poorly. Emerging market stocks fared the worst, losing 6%. The All-Country World Index lost just over 4%, while the S&P 500 gave up about 3.75%. The Dow 30 lost about 3%. The Russell 2000 Small U.S. Company Index did best of the equities, losing about 2.75%.
Commodities also suffered. Gold was the worst in this group. Its bear market continued with a loss of almost 7% for the week. Energy-based commodities lost almost 4%, while broader-based commodities lost almost 3%.
All in all, it was a clear liquidation of positions by many investors. It took a pause Friday afternoon. As I said, I believe investors are overreacting to the Fed. Short-term interest rates will stay low, because the Fed has to keep them there for some time both to allow the economy to heal and to allow the federal government to be able to afford its debt. Longer-term rates won’t rise considerably above short-term rates and can be capped by purchases from the Fed. This rough patch will continue for a while. But if the economy continues to grow, and especially if growth increases as the year goes on without additional help from the Fed, investors will take a fresh look at some of the positions they are selling.
Some Reading for You
You don’t have to give a retailer your telephone number to process a credit card transaction. Here’s why you shouldn’t.
Here’s a good extended commentary on the housing starts data discussed above.
This post says it is not the Fed that’s been holding up the stock market, so stock investors shouldn’t worry about tapering or other Fed policy changes.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
June 14, 2013 04:45 p.m.
Your Retirement Finance Week in Review
There was a pause in the damage to the U.S. bond markets, but Japan continued to suffer. Both trends followed published thoughts of central banks.
In Japan, the head of the Bank of Japan announced that the bank had done enough quantitative easing for now. The BOJ appears to be making the same mistakes the Fed made until late 2012. Stop-and-start monetary stimulus is not good for an over-leverage economy. It is better for the BOJ to adopt a policy similar to the Fed’s, in which it will maintain stimulus until certain benchmarks in economic data are met. That probably will occur not too far in the future when the current term of the head of BOJ ends and a new leader is appointed.
But the change of course in Japan’s markets the last couple of weeks had carryover effects to other markets. Many hedge funds and other investors took leveraged positions in Japanese stocks and against the yen. When there was a reversal in market trends, those investors had to either close their positions or come up with cash to meet margin calls. As often happens, many of them likely sold other assets to meet their margin calls. So, the problems in Japan caused downturns in other markets.
At the same time, the Fed appears to be trying to reverse some recent signals. A few weeks ago, Ben Bernanke hinted the Fed might tighten monetary policy sooner rather than later. I suspect this was a deliberate effort to both temper some of the enthusiasm in the markets and to see how markets might react will real tightening actually occurs. It appears markets went much farther than the Fed wanted, because Jon Hilsenrath of The Wall Street Journal wrote that the Fed is considering ways to calm the markets. Hilsenrath generally is considered to be the reporter Bernanke gives his major leaks to.
The Data
There wasn’t a lot of data this week, but it was interesting and revealed cross-currents in the economy.
Small businesses finally are starting to show some improvement. Since the bottom in 2009, large businesses have done quite well, helped by the federal stimulus and by growth overseas. Recently, the fiscal stimulus faded and growth outside the U.S. slowed. Larger businesses are hurting some from this. Small businesses suffered, because U.S. consumers were weak. In 2013, U.S. households picked up their spending pace, and small businesses grew more optimistic.
In the latest month, the National Federal of Independent Business Small Business Optimism Index had a solid increase for the second month in a row and is at its second highest level in the recovery period. Small businesses are rising while larger businesses are stumbling.
The strength in small businesses was evident in the months’ retail sales. They rose a stronger-than-expected 0.6%. Except for a pause when the tax hikes took effect, consumer spending has been very strong for months. With households adjusting to the tax increases, retail sales are likely to resume at strong growth levels the rest of the year.
On a cautious note, the mid-month version of Consumer Sentiment as measured by the University of Michigan was down after hitting a post-recovery high last month. It’s too soon to consider this a change in trend, but we have to keep watching.
What we’re still waiting for is a pick up in the labor market. Recent data indicate a stable labor market, with modest monthly improvement. That trend was re-enforced in this week’s data. The weakest part of the NFIB Small Business Optimism Index was on plans to hire more employees. Small businesses generally don’t have any.
Likewise, the Labor Department’s Job Openings and Labor Turnover Survey (JOLTS) showed little change in the number of job openings and hires.
The good news in both the JOLTS and the new unemployment claims is that businesses aren’t doing much firing. Initial claims were down again, the third week out of four. The four-week average is below 350,000.
There was a sharp increase in Producer Prices, but this was due mainly to an increase in food and energy costs for the month. The core measure still was soft and indicates rising overall inflation is not a problem.
Manufacturing remains soft. Industrial production was unchanged and below expectations. This is an increase after the previous month’s drop, but shows that weak demand outside the U.S. is affecting domestic businesses.
The Markets
Bonds improved this week after a dreadful month of May. The improvement occurred on Thursday and Friday, after the Hilsenrath article mentioned above appeared. Long-term treasury bonds rose a little over 1%. Investment-grade corporate bonds rose about 0.6%, and high-yield bonds rose 0.5%. Treasury Inflation-Protected Securities (TIPS) didn’t do as well. They lost about 0.7%.
The dollar also had a bad week. It lost about 1.6%. It continued a couple of weeks of declines after peaking on May 28.
Stocks had only one good day this week and ended down for the week. The Russell 2000 Index of small companies did best, losing only 0.5%. Clustered with losses around 1% were the S&P 500, Dow 30, and All-Country World Index. Emerging market stocks lagged the field as usual these days, losing 2% for the week.
Among commodities, energy-related commodities did best, gaining just below 1%. Gold was next-best with a modest 0.6% gain. Broad-based commodities actually lost a fraction for the week.
Some Reading for You
Did you know living with the grandkids shortens life expectancy? Read this.
Consider whether the Investment Advisory Committee of the New York Federal Reserve helped trigger the big bond market sell off. Details are here.
Apparently there’s a cyber war taking place between Iran and the rest of the world, especially the U.S. Consider this report.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
June 7, 2013 04:30 p.m.
Your Retirement Finance Week in Review
The big news for the week, though you wouldn’t know it from the media, was the Fed’s Beige Book. This is a report prepared for each of the monetary policy meetings. In it the Fed compiles reports from around the country on the state of the economy. The report is more anecdotal than data driven.
This week’s report generally was more positive than recent data. While it noted that overall growth was a bit less than in the previous Beige Book, it still is modest to moderate. Unlike most of the recent data, the report said that manufacturing is expanding in almost all Fed districts. In line with the data is the conclusion that consumer spending increased across the country.
The labor market section of the report is consistent with the recent data. Hiring is taking place at a measured pace while layoffs are not an issue for the economy. Wage growth remains modest, and inflation isn’t a concern.
Overall, the Beige Book provides no reason for the Fed to curb its quantitative easing program. We’re in a slowly growing economy. Growth is down a bit recent, because of slow demand from overseas and fiscal tightening in the U.S. The Fed’s main focus is the labor market, and that is a considerable distance from a level that would cause the Fed to tighten policy.
Let’s turn to the rest of the data and the markets.
The Data
Friday saw the monthly employment situation reports. As longtime readers know, I think investors and the media put too much emphasis on these reports. The headline number of jobs created exceeded expectations at 175,000, and expectations were declining as the week went on because of disappointing data and markets. The jobs number is in the range of recent months. (The last few months were revised upward.) It still is too low to indicate a good recovery in the economy or that the number of unemployed will decline anytime soon.
The unemployment rate rose slightly, because some people re-entered the work force. On the negative side, wages were flat for the month instead of increasing modestly, and the average workweek was unchanged. Businesses aren’t going to expand much when household income isn’t expanding. The good news is that low wage growth makes higher inflation unlikely.
The employment situation reports were in line with the earlier reports of new unemployment claims and the Challenger Jobs-Cut Report, which were a bit better than their most recent reports. The ADP Employment Report, however, disappointed analysts and wasn’t as strong as the employment situation reports.
There were a number of manufacturing-related reports, and they generally indicated manufacturing continues to throttle back in response to lower demand overseas. The PMI Manufacturing Index showed a slight increase, while the ISM Manufacturing Index and fell below 50. The ISM says a report below 50 indicates manufacturing is shrinking. Factory Orders showed a small 1% increase, but the previous month’s number was revised to a negative 4.7% after the initial report was negative 4%.
The Productivity and Costs reports also painted a mixed picture of manufacturing. The good news for manufacturers is that wages and compensation continue to be modest. Unit labor costs actually declined 4.3% after a revised 11.8% increase last quarter. Productivity increased modestly and was just below expectations.
Non-manufacturing, which makes up most of the economy, was better. The ISM Non-Manufacturing Index rose a bit and was just below expectations. This number indicates most of the economy continues to grow at a modest rate. The employment reading in the report, however, was flat.
Consumer credit showed a strong increase, though it still was below expectations. But the headline number is misleading, as it has been for some time. Most of the credit gains were in auto sales and student loans. The mainstays of consumer borrowing, credit cards and mortgages, continue to see modest increases. It is another reason businesses aren’t expanding through either capital investing or employment. Household demand remains in a period of modest growth because of low wage growth. Consumers aren’t confident enough to borrow in order to buy. So, businesses are careful not to expand too far ahead of demand.
The Markets
The markets have been very volatile lately, especially the last two weeks. Bond investors had the worst of it. We had sell signals triggered for a few of our investments, including PIMCO Corporate Income & Opportunities and DoubleLine Emerging Markets Income. Last week we sold iShares-Japan from the Invest with the Winners ETF strategy. A few other funds came close to triggering sales.
The bond sell-off took a little break this week. High-yield bonds had a small 0.5% gain for the week. Long-term treasury bonds, investment-grade bonds, and Treasury Inflation-Protected Securities (TIPS) all lost about 0.5%. But the long-term treasuries were up about 2% by mid-day Thursday when investors were becoming pessimistic about the coming employment situation report. The dollar had a bad week, losing about 2%. All that loss was incurred Thursday morning.
Stocks had an up-and-down week. They generally started the week higher, lost ground mid-week, and finished with gains. The S&P 500 led the way with about a 2% gain. The Dow 30 and All-Country World Index were marginally behind. Emerging market stocks, however, continue to trail the developed markets. The emerging market equities lost almost 1.5% for the week. Small company U.S. stocks also had a rough week and eked out a marginal gain by Friday’s close.
Commodities were all over the place. Energy-related commodities were up all week and finished with a 2% gain. Gold was up and down but tanked on Friday, finishing with almost a 1% loss after being up 1.6% on Thursday. Broad-based commodities lost about 0.5%.
Some Reading for You
Did the SEC deliberately let Bernard Madoff and others get away with it? Read this.
There’s a lot of pessimism about the markets and economy. You can find some optimism here and here.
The SEC is revising rules on money market funds. You can find some commentary here.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.<
