June 2014
Save the Date:
Join me and a star-studded cast of 50+ financial experts at The MoneyShow San Francisco, this August 21-23! Get their latest stock picks, current market outlooks, most successful trading strategies and more when you attend the Show at the Hilton Union Square. Registration is now open, so reserve your place today! To register, click here.
June 27, 2014 04:15 p.m.
Your Retirement Finance Week in Review
You can join me in San Francisco in August. I’ll be with a star-studded cast of more than 75 financial and investment experts at The MoneyShow San Francisco from August 21-23. I’ll be making two presentations and others will give their latest stock picks, current market outlooks, and most successful trading strategies and more. We’ll be at the Hilton Union Square. Registration now is open, so reserve your place today here.
This week had a good example of why I believe certain economic reports are overhyped and that investors are misguided to invest based on them. The example was the GDP report for the first quarter. This was the third of three reports. There was the initial report and two revisions. To be sure, there will be other revisions before the GDP for the first quarter really is “final,” but those revisions will be issued more quietly.
The first quarter’s GDP went from 0.1% in the initial report to -1.0% in the second report to -2.9% in the third report. So, we from the estimates went from an indication that the economy was barely growing to a deep recession decline that was the worst quarter in five years. And this all occurred after the quarter closed.
It turns out that the largest mis-estimate was on medical spending. The government initially estimated that the higher level of insurance coverage from the Affordable Care Act in early 2014 would lead to significantly higher spending on medical care. Turns out the opposite happened. Medical spending was weak in the first quarter.
The GDP numbers often aren’t consistent with other economic data that is both more timely and less reliant on estimates. That certainly was the case in the first quarter. Most of the first quarter data showed weakness compared to the last quarter of 2013, but not to the extent reported in the GDP report.
It’s understandable that the government takes some time to collect final data and give a somewhat inaccurate “estimate.” What’s not understandable is that the data moves markets. The media trump it up, and investors react to it. Everyone should be aware of the tenuousness of the data. Also, because it takes so long to generate the final estimate, by the time it is issued it is history. As the second quarter is ending, we receive the final estimate of the first quarter. Even if it is accurate, it is stale data. Another point: GDP doesn’t measure the entire economy by a long shot. The government later this year will begin a new GDP calculation that is supposed to do a better job of measuring the full economy.
Investors need to ignore the noise in the media and markets. Learn which data actually matter for more than a day if you want to adjust your portfolio over time. Otherwise, set up a portfolio that has true diversification and hold it for a long time.
The Data
As discussed above, the GDP for the first quarter came in well below expectations and the previous estimates. This shouldn’t be a surprise. The data issued as the first quarter progressed indicated that growth was faltering and that bad winter weather was a major cause. It also is no surprise that growth has improved in the second quarter. Some economists now are estimating that the second quarter GDP figure, when it’s finally reported, will reveal growth at an annualized 3% or higher.
More timely data issued this week mostly was positive.
In manufacturing, the Richmond Fed Manufacturing Index declined but still was positive. But new orders improved. The Richmond Fed survey consistently has lagged other Fed regional surveys in the second quarter. The Kansas City Fed Manufacturing Index was similar, showing growth but at a lower rate than last month.
The PMI Manufacturing Index Flash showed a healthy increase, especially in new orders. The PMI Services Flash Index also was decidedly positive. Many components of the index are at or near five-year highs. Durable Goods were a mixed report. The headline number was negative, a disappointment after a strong increase last month. But this report is volatile month to month. Also, a bright spot in the report was a solid increase in equipment investment. A steady increase in this area is one thing we’ve been waiting for to make clear that economic growth is sustainable.
There were several positive housing reports. Existing home sales had a solid increase. More importantly, the number of all-cash and distress sales is declining, indicating that we’re moving toward a more normal market. Also, inventories are rising. This will increase sales while holding down price increases.
New home sales also surged, by 18.6%. Also, prices rose 4.6%, so home builders were able to increase sales without cutting prices. The Case-Shiller Home Price Index showed another month of price increases, but the increases continued at a lower rate than in 2013. This is healthy, as the 2013 rate of increase couldn’t be sustained. The FHFA House Price Index showed no price increase for the month but still a 5.9% 12-month increase.
Personal Income and Outlays is a monthly report I’ve been watching closely. Businesses won’t invest in new equipment and employees until spending increases regularly, and households won’t increase spending until income increases more than it has the last few years. In the last month personal income increased 0.4%, which was in line with expectations and a little more than last month. I’d like to see it increase at this rate or higher for a number of months instead of the up and down increases of the last couple of years. Spending increased below expectations but was better than last month’s decline. This will increase more consistently after income does. Inflation as measured by the PCE, the Fed’s preferred indicator, is nearing its 2% target. But the Fed won’t tighten until after PCE inflation is consistently higher than 2% to 2.5%.
Consumer Confidence as measured by the Conference Board rose smartly again and once more is at a new recovery high. Consumer Sentiment as measured by the University of Michigan rose for the second month and has been rising fairly steadily since last October. But because of a big dip in the third quarter of 2013 it still isn’t back to the recovery highs of the summer of 2013.
New unemployment claims declined by 2,000, keeping the tally just over 300,000 again.
The Markets
Not much moved markets this week. Most major stock market indexes clustered with returns from 0% (emerging markets) to -0.5% (Dow 30). The exception was the All-Country World Index, which declined 1.5% after a big drop at the start of Wednesday’s trading.
Bonds on the other hand generally were positive. Long-term treasuries led the way with a gain of about 1.1%. Investment-grade bonds and Treasury Inflation-Protected Securities (TIPS) each gained about 0.5%. High-yield bonds followed stocks more than other bonds, losing a fraction for the week.
The dollar had a bad week, losing 0.4%.
Commodities were mixed again. Gold gained about 0.3%. Energy-based commodities lost about 0.3% while broader-based commodities lost 0.5%.
Some Reading for You
Here’s a good perspective on recent changes in housing prices.
Here’s a checklist on choosing a continuing care retirement community.
The coming rental housing crisis is described here.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
June 20, 2014 04:15 p.m.
Your Retirement Finance Week in Review
Before we dive into this week’s main discussion, let me address a few questions I hear from more and more readers. Are you finding it more difficult to manage your own investments? Are you holding too much cash and are concerned about what to do with it? Many investors are realizing that the complexity of today’s markets makes managing their assets a difficult proposition and they now need hands-on help meeting their investment goals. As many of you are aware I have an arrangement with TJT Capital Group, LLC, and they are the only investment management firm associated with me. The staff has over 60 years’ experience in the investment industry and they are currently offering a Free Portfolio Review to my subscribers. In today’s environment aligning your goals and objectives with your risk tolerance can be daunting, why not have a professional review how you have been doing. For more information on TJT and for your Free Portfolio Review click here. When I discuss TJT Capital, I do so in my role as Managing Member of Carlson Wealth Advisors, L.L.C.
This was a quiet week for both data and the markets. As I point out in the July Retirement Watch (now on the web site), we’re in a very low volatility period for the markets. Eventually this will end with a period of normal or even high volatility. But there’s no way to know whether that will be a period of rising or falling markets. So, stay diversified and follow recent trends until things change.
The data indicate the economy is gaining strength after slowing in the first months of the year. The Fed seems right so far that the recent growth is sustainable, and it is safe for the Fed to gradual reduce its extraordinary stimulus. It likely will be a while after that before the Fed actually raises short-term interest rates.
The Data
The data for the week generally was positive, but let’s start with a couple of negative reports.
The Consumer Price Index inflation report came in higher than expected and higher than recent reports. Increases were pretty much across the board, but energy and food prices have been rising recently and led the way. The one-year number now is up to 1.9%, almost within the Fed’s target range. I wouldn’t read too much into this. It’s only one month’s data. But it does show that the economy is reaching a sustainable growth rate and the labor market is healing. Inflation isn’t high enough to cause the Fed to raise interest rates, but in another year or so it might be.
Speaking of the Fed, it held a meeting this week. As expected it continued on its tapering schedule and its statement indicated the slow labor market still is the major concern. It also issued revised economic reports from Board members. I’ve pointed out for a while that Fed forecasts are notoriously inaccurate, and I thought those who feared a rapid Fed tightening were overlooking that the Fed frequently forecasts a better economy than actually occurs. We had an example of that this week, as many Fed Board members reduced their forecasts a bit.
A series of manufacturing reports indicate that portion of the economy is doing well after slowing over the winter. The Empire State Manufacturing Survey, one of the weakest recently, came in at a four-year high. It was well above forecasts and recent months. New orders in the report also were at a four-year high.
Industrial Production also reported well above expectations and last month’s negative number. Plus, last month’s decline was cut in half in a revision. The Philadelphia Fed Survey also came in well above expectations and recent months. It shows growth is accelerating in a region that lagged much of the nation in recent months.
A couple of housing reports for the week were mixed, continuing the recent trend of showing continued growth but at a much lower pace than in 2013. The Housing Market Index from the National Association of Home Builders was above last month and expectations. It was the highest reading since January but still at 49, when 50 in the index is considered growth or break even. Strong components of the index were current sales and future sales expectations, though traffic in new homes still is low.
Housing starts disappointed analysts by declining and coming in below expectations. But there are a few points to keep in mind. Last month’s number had a strong spike because of a bounce back from the winter weather. Also, starts are higher than for the same period a year ago and this was only the fourth month with more than one million starts since early 2008.
The Leading Economic Indicators as published by The Conference Board had another strong increase, though they were slightly below consensus expectations.
The Markets
Markets calmed down after last week’s strong reaction to the new fighting in Iraq.
Stocks were positive. Smaller companies as measured by the Russell 2000 Index did best, scoring almost a 2% gain. The All-Country World Index and Dow 30 were next with returns just above 1%. The S&P 500 returned just under 1%. Emerging market equities barely had a gain over taking dives Thursday and Friday.
Long-term treasury bonds didn’t fare as well. They were down all week and closed with a loss of loss of just over 0.5%. High-yield bonds generally follow stocks and did so this week, gaining about 0.4%. Treasury Inflation-Protected Securities (TIPS) also gained on news of higher inflation, scoring about a 0.5% return. Investment-grade bonds were about even.
The dollar lost 0.2%.
Gold was flat until shooting higher on Thursday. It closed the week with a 3% gain. Energy-based commodities and broader-based commodities tracked each other closely all week and closed with gains just over 1%.
Some Reading for You
There’s a debate among economists over whether or not there is a retirement question. The debate is about different assumptions. You can read more here.
Earlier I said not to worry much about the recent higher inflation data. Here’s a summary of reasons.
Is insider trading higher than we realize? New research says it is.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
June 13, 2014 04:15 p.m.
Your Retirement Finance Week in Review
Markets became more volatile as the week went on after months of low volatility and complacency. This can be attributed to several factors. One is that stocks had strong returns in late April and May. Investors might have been ready to take some profits. Another was the surprising loss in a primary of House Majority Leader Eric Cantor. Surprises and change tend to unsettle investors until they process the effects.
Geopolitics are another factor. In particular, in Iraq there was a turn for the worse as antigovernment forces staged a surprising and successful offensive against some major cities. They were able to take the cities, at least temporarily. Political analysts opined that the U.S. was surprised by the action, and the President indicated that the Iraqi government might need fresh U.S. help. The most recent headlines say that the jihadists might be able to take the capital.
This is why we stay diversified and usually have “sell below” prices set for our investments. Things could change either economic fundamentals or market sentiment at any time. For now, the change in direction is modest, and we can’t tell if it will continue. So, we’re leaving portfolios as is for now, but watching events closely.
The Data
This was a quiet week for data with only two widely-followed reports.
One was the NFIB Small Business Optimism Index. This is especially important because it lagged through most of the recovery. The initial fiscal and monetary stimulus measures benefited primarily large businesses. But since mid-2013, the NFIB Optimism Index has been rising steadily. In recent months the increase accelerated. For the second month in a row, the index rose smartly and is at the highest levels since September 2007. Importantly, among the rising subsets of the index are hiring plans. Small businesses finally are talking about hiring more and increasing wages.
Retail sales, on the other hand, disappointed most analysts, but the headline number can’t be taken at face value. Retail sales are volatile month-to-month, so multi-month trends are more important than one number. Also, last month’s number was revised from a 0.1% increase to 0.5%. Some analysts also say that because of the way the survey samples auto sales, the monthly number can be inaccurate. This month, they say the sales number reported by the auto industry was significantly higher than in this report. Overall, households have a trend of spending more despite very modest wage increases and will spend more if wage increases accelerate.
Another interesting report was JOLTS (Job Openings and Labor Turnover Survey). This isn’t as timely as the monthly labor situation reports, but it is more detailed. It showed steady improvement in job creation and better than expectations. Interestingly, there were more job openings than hires, indicating that businesses can’t find qualified workers for their openings, at least not at wages they are willing to pay. The number of people willing to quit jobs for new ones is above the lows of the recession, but still isn’t at average levels.
New unemployment claims rose only 4,000 to 317,000. This measure has been in the same range for weeks now and is another indication that the labor market is slowly, steadily returning to normal levels.
The mid-month Consumer Sentiment reading by the University of Michigan was a little below last month and below expectations. But the report was not entirely negative. The major negative was expectations, while sentiment improved regarding current conditions.
Producer Price Inflation turned negative this month and is 2% over 12 months. The deflation was pretty much across the board and backs up what I’ve said for many months, that deflation is a greater concern than inflation.
The Markets
Stocks had a negative week despite modest gains early in the week and a slight recovery on Friday. The Dow fared worst, losing just over 1%. The S&P 500 and Russell 2000 both lost just under 1%. The All-Country World Index had about a 0.6% loss, while emerging market stocks did best with about a 0.175% loss.
Bonds mostly were modestly positive. Long-term treasuries fared best, gaining over 0.6%. Investment-grade bonds returned 0.2%, while high-yield bonds were just above break even. Treasury Inflation-Protected Securities (TIPS) gained just over 0.1%.
The dollar lost 0.1% for the week.
Commodities had a good week. Thanks to the events in Iraq, energy-based commodities did best with about a 2% gain. Gold was just a fraction behind. Broader-based commodities gained about 0.8%.
Some Reading for You
Estimates of retirement benefits from the Social Security Administration might be systematically understated. Details here.
It turns out that many retirees who work don’t do so for the money, according to a Merrill Lynch survey.
Here’s where 10 classic recession indicators stand today.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
June 6, 2014 11:40 a.m.
Your Retirement Finance Week in Review
I’m traveling Friday afternoon this week, so this report doesn’t include any data or market action after about 11:30 a.m. Friday.
The big news this week was from Europe and generally was regarded as good news.
The European Central Bank finally decided to take significant action along the lines of the quantitative easing employed by the Federal Reserve and the Bank of England several years ago. Since the European sovereign debt crisis roiled markets in 2011, the ECB has been a big talker but slow to act. At first, this seemed good enough. The ECB’s talk plus some modest actions stabilized markets.
More recently, however, it’s been clear more is needed. While Europe’s economy bounced off the bottom of its depression, growth is weak. More importantly, growth is slowing and inflation quickly is approaching zero. Central bankers and most economists fear few things more than deflation. Often deflation causes economic activity to grind to a halt and leads to a deflationary depression that is tough to reverse.
The ECB actually went a step further than other central banks. It reduced the interest rate it pays on deposits of excess reserves commercial banks have at the ECB to a negative rate. The ECB will charge banks to leave money on deposit at the ECB instead of lending it or investing it elsewhere. It also reduced its main lending rate and took other measures that are somewhat technical but should affect lending and economic activity.
Importantly, ECB President Mario Draghi said the ECB members were unanimous on these actions and in their commitment to take further measures, including large-scale asset purchases, if needed to push inflation and growth to the ECB’s targets.
The measures were accompanied by a revised forecast from the ECB. The forecast is that inflation will be 0.7% in 2014 instead of the 1% forecast in March and far below the 2% target. Growth was reduced to 1% from the 1.2% forecast in March.
Investment markets had a bumpy reaction at first to the news but settled into a pattern of higher stock prices globally and a lower euro against most other currencies.
Europe has been the weakest part of the global economy and the biggest risk to other economies. If Europe’s growth were to stall or slide into another decline, The U.S. and most emerging economies would feel pain, and it could drag the global economy into a recession or worse.
So, the ECB’s actions were welcomed by most investors. The main concern is whether the ECB waited too long to act. I suspect they did and that this week’s actions aren’t sufficient to
The Data
A few important data reports were issued this week. They continue to be mixed, but are more positive than usual and point to stronger growth.
Consistent with this view was the Fed’s Beige Book issued this week. In preparing the book, the Fed staff contact businesses in each region of the country to obtain both anecdotes and data. The book reports that the economy is growing in all regions. Most regions are growing faster than they were for the last report, and none is doing worse. Manufacturing is looking particularly strong throughout the country. Despite the growth, there are labor shortages and rising wage pressures in only select sectors of the economy and country. Overall, there still aren’t pressures to increase wages.
Two reports from the Institute for Supply Management also were important this week. The ISM’s Manufacturing Index increased again, continuing its pattern of steady monthly increases. (This was confirmed by the PMI Manufacturing Index released at about the same time.) A couple of days later the ISM Non-Manufacturing Index showed a fairly strong increase. (This was concerned by the PMI Services Index.)
The negative in these reports was that new hires and plans to hire were weak. So, while growth is increasing, it is doing so without substantial improvement in employment and wages.
Factory orders also revealed strength in manufacturing, rising above expectations. Plus, last month’s alreadyong number was revised higher. The strength was almost across-the-board.
The Productivity and Costs report for the first quarter had its second revision during the week. It was poor, with the negative initial productivity number being revised down. At the same time, labor costs were revised substantially higher. The report, however, is from the first quarter and largely reflects the distortions from weather during that period.
The employment picture was mixed for the week. New unemployment claims rose slightly after two weeks of very large declines. The ADP Employment report indicated fewer new jobs were created than expected.
The overhyped Employment Situation reports on Friday were the main labor market focus. The numbers were considered positive. The 217,000 new jobs created was much less than last month’s 282,000 (revised down from 288,000 first reported). While not historically strong job growth, it is better than most month’s since the recovery began in 2009 and the fourth consecutive month of over 200,000 job gains, the first such stretch since January 2000.
In the more important parts of the report, average weekly hours were unchanged, and average earnings increased only 0.2%. This shows again weak growth in household incomes despite the increase in jobs.
Overall, we see characteristics of an economy near the middle of the business cycle. Growth is about to slightly above average with some choppiness. There are no signs of a recession, but growth doesn’t have the high rate that often characterizes the early portion of a business cycle.
The Markets
It was a good week for stock investors with most U.S. indexes reaching new highs. The stock indexes were clumped together most of the week but diverged on Friday. The Russell 2000 led the way with a gain of about 3.5% for the week. Emerging markets stocks were next with a 2% gain. The S&P 500 returned about 1.5%, which the Dow 30 and All-Country World Index each returned just over 1%.
Bonds didn’t fare as well. Long-term treasuries dipped over 1%. Investment-grade bonds lost about 0.4%, and Treasury Inflation-Protected Securities (TIPS) lost over 0.6%. High-yield bonds managed a 0.3% gain.
The dollar lost a small amount over being up a small amount earlier in the week.
Gold was up and down during the week but in a narrow trading range. It closed up about 0.2% after being up 0.5% on Thursday. Energy-based commodities closed with about the same gain after being down 0.4% on Thursday. Broader-based commodities were down most of the week and lost 0.3%.
Some Reading for You
Successful poker players can teach you valuable lessons about investing and managing your finances. Read more here.
Has QE really worked? Martin Feldstein of Harvard says it did, but with a substantial lag. Read what he thinks about 2013 and 2014.
This is a collection of eight retirement mistakes that some interviewed financial planners say you should avoid.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
