June 2015
June 26, 2015 04:25 p.m.
Your Retirement Finance Week in Review
There still is time to take advantage of your free registration for the San Francisco MoneyShow, July 16-18 at the Marriott Marquis. I’ll be making two presentations on Saturday, and we’ll have a booth throughout the show at which we can meet our members. You can register free by clicking here or by calling 800-970-4355 and mentioning you’re a Retirement Watch member.
There was good news this week on the legal front. Many of you are aware of the group of crooks that’s been scamming publication readers nationwide for years. They deceitfully obtained mailing lists, and then sent the readers fake renewal invoices. They would charge readers about twice the regular renewal rate and pocket the money. Earlier this year a group of state attorneys general sued the crooks. This week the state of Oregon, home to the crooks, announced a settlement that effectively puts the group out of business. They’ll pay $3 million to the state and make up to $500,000 in refunds to Oregon resident who were robbed. You can read the release from the Oregon Attorney General here and profiles of the crooks here and here. The Attorney General’s release tells you how to obtain compensation if you were an Oregon resident who was scammed.
The data continue to show the economy is growing, though at a slower rate than in 2014. The data also show the importance of knowing how to read the data and knowing which reports to de-emphasize. A good example is the GDP report, which bounces up and down in the three revisions for the each quarter of 2015. Other reports, such as retail sales, are volatile month to month, so the reaction to one month’s data should be cautious.
Overall, housing continues to improve at a slow rate and from a very low level. Manufacturing appears to be finding a bottom. The consumer benefits from the decline in oil prices generally has faded, and the manufacturing and business investment drag from the commodity declines also are fading. There are few monetary or fiscal incentives for growth now, and in fact most policies are drags on growth. But the labor market continues to improve, with income growth appearing to improve. Consumer confidence remains near its highs, which usually is a good indicator of household demand and the state of the labor market. Inflation continues to be very low and offers no reason for the Fed to tighten policy.
The Data
The housing market continues to improve. Existing home sales increased 5.1%, well above last month’s level and above expectations. The annual increase in sales is 9.2%. Even better, the sales increase came despite rising prices, with the median selling price up 7.9% over 12 months. New home sales also rise, with a 2.2% gain. And this is after last month’s number was revised significantly higher than the initial report. But this came at the expense of prices, which declined 2.9% and are down 1% over 12 months.
Since the financial crisis new home sales have suffered, because they couldn’t compete with the distress and foreclosure sales of existing homes. Now, the distressed and foreclosure sales largely are behind us, so new homes can compete. The last two new home sales reports justify the optimism that’s been in the NAHB monthly survey all year but didn’t show up in sales until recently.
The FHFA Home Price Index was moderately positive, with a 0.3% monthly price gain and 5.3% 12-month gain.
Manufacturing still is weak but showing signs of bottoming with a series of mixed reports this week. Durable Goods Orders declined again, worse than expectations and than last month. But when the volatile transportation sector is excluded, they rose 0.5%. Last month’s data were revised sharply lower, showing that this is a release that needs to be looked at over time instead of monthly.
The PMI Manufacturing Index Flash was mixed. It still indicates growth, but it came in a bit below last month and expectations. It also is the lowest reading since October 2013. The Richmond Fed Manufacturing Index was positive and a meaningful increase from last month. Important components of the index, such as new orders, were very positive. The Kansas City Fed Manufacturing Index, which covers one of the regions most exposed to the decline in commodity prices, was negative, though a little less negative than last month. There wasn’t much to be positive about in the report.
Consumer sentiment as measured by the University of Michigan improved substantially, well above last month and expectations. The gains in expectations for the next six months were especially strong, indicating households feel good about the job market.
The Personal Income and Outlays report backs up the sentiment reading. Incomes increased 0.5%, and last month’s income growth was revised up to 0.5%. That’s the first two months of solid income gains in a while. Consumers were confident enough to dip into savings and spend more than their incomes, increasing spending by 0.9%. Another good sign is that the PCE Index, the Fed’s preferred measured of inflation, increased only 0.2% over 12 months. Subtracting food and energy, the increase still was only 1.2%.
New unemployment claims increased only 3,000 after a big drop last month. The four-month average continues to decline.
The first estimate of the first quarter GDP released last month was a negative 0.7% growth rate. This was revised higher in the second estimate but still to a negative rate of 0.2% annualized. This is, of course, a backward-looking number. The economy since has improved, and the second quarter GDP is likely to show about 2% to 3% growth when those estimates are released in a few months.
The Markets
Most investments lost value as the week progressed, probably due to reports about the Greece debt negotiations. Emerging market stocks were up 1% early in the week but closed with a loss of about 1.8%. The All-Country World Index fared worst of the stock indexes, losing about 2.2%. The U.S. indexes tracked each other closely during the week and closed with losses of just over 1%.
Bonds also had a bad week. Long-term treasuries fared the worst, losing 2.2%. Investment-grade bonds lost about 1%. High-yield bonds did slightly better. Treasury Inflation-Protected Securities (TIPS) lost about 0.8%. None of the bond categories was in positive territory during the week.
Commodities for the best part did better. Gold trailed with a loss of almost 1%. But energy-based commodities gained about 1.25%, and broad-based commodities gained almost 2%.
Some Reading for You
This post explains why you should develop or pay attention to forecasts when planning your investments.
The recovery in the U.S. housing markets is not uniform. This report gives the breakdown by major city.
Here’s one report on how to spot a crowded trade, or a bubble.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
June 19, 2015 04:15 p.m.
Your Retirement Finance Week in Review
The week had two interesting bits of news. Neither should be a surprise, but both are worth noting.
First, the Federal Reserve had one of its regular Federal Open Market Committee meetings. It didn’t vote to increase interest rates. But as part of the meeting, the Fed released the economic forecasts of the committee members.
The forecasts showed the optimism with which many Fed members began the year has faded. Projections for economic growth and inflation are reduced. That also means that interest rate increases are likely to be both later and more gradual than most expected at the start of the year. Both stock and bond markets liked the news.
I say this shouldn’t be a surprise, because this happens regularly. The Fed usually overestimates economic growth and inflation, and then it has to revise its estimates as real data comes in. One would think that with all the Ph.D. economists and other resources at the Fed that it would have the best forecasts in the world, and maybe it does. But many people looking at the data can issue forecasts at least as accurate as the Fed’s.
Second, in 2013 there were apparently more withdrawals from 401(k) plans than contributions. That’s from an analysis by the firm Brightscope, Inc., compiled from various data sources. This is believed to be the first year that distributions exceeded contributions.
This is further evidence of the aging of the workforce and how the Baby Boomers are influencing macro trends. As more and more Boomers reach retirement age, this trend will continue.
What’s not clear is all the ways this will affect the economy. Will financial services firms have to reduce fees to be more attractive in the competition for fewer dollars? Or will they increase services in some way? Will a number of firms disappear as the financial services industry consolidates? Or will the younger generations increase their retirement savings and eventually offset or even overcome the Boomers’ distributions?
Another interesting point is that the inflection point came a few years ago for the largest firms that service 401(k) accounts. They tend to have an older client base, so their withdrawals exceeded contributions about four years ago.
While 401(k) distributions exceed contributions, that doesn’t mean the financial services firms are losing assets. In many cases, the 401(k) accounts simply are being rolled over to IRAs. They also could be used to purchase annuities or invest in taxable accounts at the same firms. So, many of the firms are not hurting as much as the headline data suggests.
The Data
There was a small amount of data issued this week, and most of it was positive.
The negative reports for the week were from manufacturing. Reports the last couple of weeks indicated that manufacturing might be stabilizing at a low level, but this week’s reports indicate the bottom might be a bit lower than last week.
The Empire State Manufacturing Survey was a small negative, but that’s after a positive number last month and well below expectations. Industrial Production also declined, as did the manufacturing sector in the report. The Philadelphia Fed Business Outlook Survey, however, was surprisingly and strong positive. Next week will be two more Fed regional bank reports on manufacturing which should give a clearer picture of the state of manufacturing.
The housing reports for the week were positive. The Housing Market Index from the NAHB took a sizeable jump and was well above expectations. This index has been signaling higher new home sales for months, and that increase didn’t materialize until recently. Now, the HMI is indicating even higher new home sales to come.
And in a related release, housing starts did well. The headline didn’t appear positive, but further scrutiny is very positive. Last month’s new home sales number was historic, so this month was almost certain to be less. Also, last month’s number was revised even higher. But this month’s number still is strong. Also, new permits issued had another surge this month after a big jump last month. So, the two housing reports this week are very positive.
The Leading Economic Indicators from The Conference Board had another strong gain and exceeded expectations after a strong gain last month. All 10 of the reports components were positive.
Inflation remains under control. The headline number was a 0.4% increase for the month, following 0.1% last month and a few negative numbers in the recent past. But excluding food and energy, the increase was only 0.1%. Oil’s bounce from its lows explains most of the increase and isn’t a harbinger of rising inflation. Also, the outsized role of housing in the CPI also overstates inflation in this report.
The labor market continues to improve with a decline in new unemployment claims. The four-week moving average now is 276,000, well below average.
The Markets
Stocks had a good week, mostly because of the surge following the release of the Fed’s revised economic forecasts. The Russell 2000 U.S. Smaller Companies Index led the way, rising all the way to almost a 3% gain. The other major stock indexes that I track each week were clustered with gains from just over 1% to just under 1.5%. The Dow was the leader with emerging market stocks being the laggard.
Bonds also had a positive, though there was a lot of volatility. Long-term treasuries did the worst with a 0.2% gain, and they were down 1.6% late Thursday. Investment-grade bonds gained 0.4%. High yield bonds gained 0.6%. The week’s leader was Treasury Inflation-Protected Securities (TIPS) with a 0.8% gain.
The dollar lost about 1.1%.
Commodities were mixed. Gold had a good week, gaining 1.5%. Energy-based commodities lost 0.5%, while broader-based commodities lost about 0.25%.
Some Reading for You
Here’s an interesting report on what usually happens to stolen art.
You should know about Russia’s internet trolls and the harm they attempt to do.
Here’s a good overview of the debate about the recent reduction in productivity.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
June 12, 2015 05:25 p.m.
Your Retirement Finance Week in Review
The best commentary this week came from Greg Ip of The Wall Street Journal. He said that three recent economic puzzles or paradoxes seem to be solved by this week’s data.
One puzzle was that despite the steep recent declines in energy prices, consumers weren’t spending more. That issue seemed to be resolved with the sharp monthly jump in retail sales. The second puzzle was that despite the sharp drop in unemployment and increase in jobs available the last few years, wage increases have been modest. The recent data showed higher wage increases. The third puzzle was that the bond market seemed to be ignoring the Fed’s statements that it would be raising interest rates this year. But long-term market interest rates shot higher in the last two months.
Even so, it appears that markets are overreacting to these recent moves.
The increase in bond yields seems to be far higher than what the Fed is likely to do with short-term rates. Bond investors might have gone from being too complacent to panicking. Or, perhaps more likely, investors made a lot of money bettering on a low euro and lower German interest rates and finally cashed in their profits. A lot of people reversing the same trade within a short time frame moved interest rates from “too low” to “too high.”
The wage increases, while higher, still are very modest by historic standards. There’s also doubt about the staying power. If the Fed were to raise rates too much or there were some other disruption to the economy, the economy would weaken and threaten the strength of the labor market.
The recent increase in retail sales is one trend I believe is sustainable. The consumer sentiment surveys have been very positive, and historically these are good indicators of future household demand. The economy probably is growing at or just above the historic average right now after stumbling in the first quarter. But that’s still a very low rate of growth for the first half of the year, and I don’t see a catalyst to make growth surge.
At this point in the market cycle we have to expect volatility and periods when markets reverse recent trends and seem to be starting a sustainable move in the other direction. It’s important not to overreact to short-term noise.
The Data
Overall, there wasn’t much data reported this week. But what was issued was positive and often better than expected.
The big, and positive, surprise for the week was retail sales. Different measures of retail sales recently have been disappointing, with sales growth being close to flat despite lower gasoline prices, higher wage increases, and higher employment. The latest monthly report put many analysts’ fears to rest with a 1.2% increase in retail sales. Even after subtracting autos and gasoline, sales increase 0.7%.
When the retail sales numbers were disappointing I cautioned not to read too much into the monthly reports, because they are volatile. This month’s report is more consistent with leading measures of retail sales, such as consumer confidence.
The NFIB Small Business Optimism Index also sharply increased. Early this year its measure was down from the recovery highs of late 2014. But this month and last the index rose again to a very high level. The report was positive across the components.
Employments news also was positive for another week. New unemployment claims increased a small amount. The monthly JOLTS (Job Opportunities and Labor Turnover Survey) report was positive with a strong increase in the number of job openings. The survey goes back to 2000, and this month is one of the highest reports of job openings in its history. Over the last 12 months job openings are up 22% according to the report. The number of separations (people leaving voluntarily) decreased slightly but is consistent with recent months and long-term trends.
There was a small sing of inflation increasing. The Producer Price Index rose 0.5% for the month. That was well above recent negative readings and slightly above expectations. It still makes for a negative 1.1% 12-month change, and after subtracting food and energy there was only a slight increase in prices.
Consumer Sentiment as measured by the University of Michigan took a jump. That brings positive sentiment back close to the highest levels of the recovery, which were recorded earlier this year.
The Markets
Most markets did better this week after several weeks of difficulty.
Stock indexes declined early in the week, recovered midweek, and declined a bit Friday to record modest gains for the week. Unlike recent weeks, global stock indexes tended to move together this week.
The All-Country World Index fared best with a return of about 0.6%. Emerging markets fared worst with a gain of about 0.2%. The S&P 500 gained about 0.3%. The Dow Jones Industrial Average and Russell 2000 U.S. Smaller Companies Index both gained about 0.5%.
Bonds finally had a bit of a recovery. Long-term treasury bonds continued their recent decline at the start of the week, falling by 2% as of Wednesday’s close. But they surged Thursday and early Friday before stalling. They closed with a fractional weekly gain.
Treasury Inflation-Protected Securities (TIPS) broke even. Investment-grade bonds lost 0.2%, and high-yield bonds lost 0.3%.
The dollar lost 0.8% for the week.
Commodities also stabilized. Broad-based commodities lost a fraction. Energy-based commodities and gold both gained just under 1%.
Some Reading for You
Here’s a psychologist explaining the myths about happiness and the paradox that those who consciously seek happiness usually don’t find it.
I like to point out that correlation doesn’t equal causation, especially in the markets. Here’s an interesting video that makes the point.
There apparently is such a thing as “the hot hand” according to the latest research.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
June 5, 2015 04:50 p.m.
Your Retirement Finance Week in Review
The traders who influence short-term trends in the markets and the financial media focus mostly on the latest data, rumors, and news. They’re all focused on the short-term. The traders might be able to make money that way, because they’re managing assets full time.
The rest of us need to take a step back and look at trends that are a bit longer term.
The U.S. economy was growing at a fairly rapid pace in 2014. It slowed at the end of the year and stalled in the first quarter of 2015. The GDP report, which recorded negative growth in the second estimate of GDP, overstates the downshifting because of the way GDP is computed. The second quarter data show an increase in growth, but the U.S. economy still isn’t growing at the same rate as in 2014.
Manufacturing has been the slowest sector recently. It’s been hurt by the strong dollar, the decline in commodity prices (and the resulting reduction in production and exploration), and a generally weak global economy. The lower growth in China has been particularly hard on manufacturers and commodity producers. In recent weeks, however, the manufacturing sector appears to be stabilizing. It’s not contributing to growth at this time, but manufacturing doesn’t seem to be shrinking any more.
Housing appears to be contributing positively to growth. It isn’t red hot by any means and is well below the peak levels and even average levels. But it appears to be growing. Two factors are holding back housing. Tight mortgage underwriting at most lenders means people who easily qualified for mortgages a few years ago are either being denied mortgages or be authorized to borrow less. Also, household formation is low. Young adults especially aren’t forming households and buying housing at the same rate they have historically.
The non-manufacturing sector of the economy also is doing well, but not as well as in 2014. The puzzle at this point is retail spending. Employment is up and consumer confidence is high. These usually are indicators of strong retail sales growth. Yet, sales growth has been uneven and mostly surprised analysts on the downside in recent months.
The economy is neither strong nor weak. Instead, some sectors are doing well, others poorly, and still others are in between.
Markets aren’t reacting to economic data much these days. Instead, they’re watching the central bankers, trying to determine what the bankers will do next, and anticipating how that will affect markets. Stock and bond investors seem to want different things. Stock investors continue to favor interest rates near zero and central bank support for the economy and markets. Bond investors seem to want the Fed to increase interest rates at least a little.
One thing that seems clear from the last couple of weeks is that the ability of central bankers to influence behavior by words instead of actions is waning. Recently both Janet Yellin of the Fed and several officials of the ECB made public statements that seemed designed to soothe markets and would have done so in the past. Yet, both stock and bond markets reacted negatively.
I think all investors want an end to the guessing games. They want to know where monetary policy is headed. Until that is clear, expect markets to be stuck in trading ranges with a lot of volatility within the tops and bottoms of the ranges.
The Data
The Fed’s Beige Book released this week confirmed what other data have been telling us and seemed to confirm that the Fed won’t raise rates at the June meeting. The book reported that the economy still is growing in all regions, but at a slower rate than earlier. The Dallas and Kansas City regions are lagging the rest of the country, because of the influence of energy and commodities.
Personal Income and Outlays continue to confuse investors. Income was up 0.4% after being flat last month. But consumer spending was flat after being up 0.5% last month. It’s worth noting that Personal Income in this report includes more than salaries and wages. It also include interest and dividends and other types of income. So, not all the income in the report is the types likely to be spent on a regular basis.
The report also shows inflation as measured by the PCE Price Index, the Fed’s preferred inflation measure, to be well below the Fed’s target of 2%. The PCE measure doesn’t give as much influence to housing as the CPI, and that’s one of the reasons it reports consistently lower inflation than the CPI these days.
Another source of confusion was Consumer Credit. It is up strongly for the second month in a row, and revolving credit (credit cards) were a bit part of both increases. This is an important change. Most credit increases since the recovery began were in auto and student loans. Yet, the increase in credit card use doesn’t match the disappointing recent data on retail sales on consumer spending.
The week’s manufacturing reports generally showed the sector to be stabilizing after declining sharply most of this year. The PMI Manufacturing Index declined slightly but was above expectations and still is at a level indicating modest growth. This is the most positive of all the manufacturing reports. The ISM Manufacturing Index increased from last month and was above expectations. But it indicates only modest growth.
Factory Orders declined for the eight of nine months, but last month’s positive number was revised slightly higher. Excluding the volatile transportation sector improves the report a bit, but overall it still is negative.
Productivity in the first quarter declined 3.1%, for the third straight quarterly decline. That’s not surprising given the decline in the economy in the first quarter. It’s also not surprising that unit labor costs increased 6.7% for the quarter. Those higher costs don’t indicate wage increases. Instead, they indicate workers producing less because there was less demand for products.
The rest of the economy is doing better. The ISM Non-Manufacturing Index declined a little but still indicates solid growth. The PMI Services Index was a similar story. It was higher than the mid-month flash report but lower than last month’s end-of-month report.
The employment reports leading up to Friday’s widely-watched Employment Situation reports were positive. The ADP employment report showed an increase of 201,000 jobs, significantly higher than last month and slightly above expectations. New unemployment claims declined by 8,000, and the four-week average is below 275,000. Most numbers in the report are around 15 year lows.
The Employment Situation reports followed through with a positive report that new jobs created greatly exceeded expectations and last month’s number. Also, the last two months’ numbers were revised higher. There were no negative features hidden in the report. The unemployment rate increased, but that’s because the labor force increased. The average workweek remained the same. But in an important number, average hourly earnings increased 0.3%. Sustained higher wages lead to sustained growth but also to inflation.
As is their wont, many economists overreacted by reversing their positions and stating the report means the Fed has to raise rates at its June meeting, or September at the latest. But Fed officials know this report will be revised, and that other recent reports haven’t been as strong as this one.
The Markets
Stock indexes diverged this week but were mostly negative. The Russell 2000 U.S. Smaller Companies Index distinguished itself by gaining about 1.3%. Emerging market stocks on the other hand declined 2.5%. The S&P 500 lost about 0.6%. The Dow Jones Industrial Average and All-Country World Index both lost just over 1%.
Bonds also didn’t have a good week. Long-term treasuries were down all week and closed with a loss of almost 4%. Investment-grade bonds lost about 1.7%. Treasury Inflation-Protected Securities (TIPS) lost 1.5%, and high-yield bonds lost about 1.25%.
The dollar lost about 1.6%.
Commodities also lost money. Broad-based commodities lost just u
