March 2014

March 28, 2014 04:14 p.m.
Your Retirement Finance Week in Review

Periods of low volatility in the markets often are followed by periods of high volatility. Stock market volatility in 2013 was low, and it’s been followed by a lot of volatility in the first quarter of 2014. But the volatility has taken investors on a wild ride to nowhere in 2014. The S&P 500 is up a fraction for the year to date, and the Dow 30 is down a little less than 2%. The same is true for the week. There were big rises and declines, but the markets closed with small changes for the week.

I suspect investors generally have been looking for reasons to sell stocks after the strong returns of 2013. Lately, they’ve been finding those reasons overseas. This week the major reasons to sell were weak data from China and the continuing crisis involving Ukraine.

The U.S. economic data haven’t helped. The data for the most part continue to show that the economy is slower than in 2013. Growth outside the U.S. already was declining, So, there are a lot of reasons to worry about what will support higher stock prices.

Adding to the uncertainty, as we’ve mentioned the last couple of months, is the effect of the weather on the economy. Clearly, the weather had a negative effect on the economy. The uncertainty is how much of the recent reduction is growth was from the weather and due to be reversed and how much was weakness from other factors and likely to be sustained.

You aren’t likely to guess the answer correctly. Instead, position your portfolio for the most likely answer. But have contingency plans that you’ll implement if things turn out differently. That’s what we do in Retirement Watch. The practice will generate solid returns in good markets and avoid large losses in bad markets.

The Data

The data for the week from the U.S. was mixed, but the surprises tend to be positive. The negative surprises came from outside the U.S., such as the data from China.

Let’s start with housing. This was the big week of the month for housing data. Pending home sales declined again, and last month’s decline was revised lower. New home sales also declined, and the previous month’s number was revised lower. Home price data was more positive with the S&P Case-Shiller Index and the FHFA House Price Index both reporting solid gains for the month and the last 12 months, though the growth rates are lower than in 2013.

It’s important to note that changes are taking place in housing. Sales are lower and price increases are lower because there are fewer all-cash investors. They have diminished interest because prices now are higher. Buyers now tend to be those looking to reside in the homes. Also, there are fewer distressed and foreclosure sales than a few years ago. Higher mortgage rates and home prices also reduce the number of sales and price increases.

While these factors make the data less robust than in 2013, for the long-term they are positive. They show the housing market shifting closer to a normal market in which most purchases are by long-term home buyers. Sellers aren’t forced to sell and buyers aren’t pressured by rapid price increases to buy at any price. You can expect lower price increases and sales growth than in 2013, but I still expect a steadily improving housing market.

The manufacturing data for the week generally was positive. There were two exceptions. The Richmond Fed Manufacturing Index was negative and worse than last month. Durable goods initially appeared to be positive, but they were distorted by the volatile aircraft sector. Take that sector out and the increase was very modest. Dive into the data and it is clear that homeowners aren’t purchasing major appliances.

On the other hand, the PMI Manufacturing Index mid-month flash report was positive. It is lower than last month’s, but it still is a strong number. The Kansas City Fed Manufacturing index showed a strong increase. In addition, many firms reported that they are having trouble finding qualified employees and are pressured to increase wages.

Two consumer confidence readings also were positive. The Conference Board Consumer Confidence Index was well above last month and than expectations. The expectations components were very strong. But plans to make major purchases in the near future were weak. Consumer sentiment as measured by the University of Michigan was slightly above last month’s strong reading but well below the recovery highs of about a year ago.

The third and final report of GDP for the fourth quarter of 2013 didn’t change much, recording a 2.6% annualized growth rate. At this point the report is history and didn’t affect markets.

Personal Income and Outlays were positive surprises for investors on Friday. For some months, consumer spending growth exceeded income growth, and income growth was weak. Households were reducing savings in order to maintain spending. There’s a limit to how long that can continue. This month, personal income rose 0.3%, slightly higher than expected, and consumer spending rose the same amount. This shows consumer income and demand weren’t significantly affected by the weather of the last few months. It also provides some hope that both factors will increase in coming months, providing a boost to economic growth.

The Markets

There was a wide divergence between the major stock indexes this week. The big loser was the Russell 2000 U.S. Smaller Companies Index. It was down all week and closed with a loss of over 3%. The smaller companies have been the leaders for a while, and this week many of the market leaders tumbled more than the indexes.

The winner was emerging market equities. The index soared almost 4% and was up all week. The All-Country World Index also registered a positive return, gaining about 1%. The Dow 30 and S&P 500 each lost less than 0.5%.

The dollar was down all week and closed with a 0.1% loss.

Bonds generally had a positive week. Long-term treasury bonds led the way, gaining 1.2%. Investment-grade bonds returned 0.6%, while high-yield bonds and Treasury Inflation-Protected Securities (TIPS) each returned about 0.2%.

Commodities had mixed returns for the week. Gold had a bad week, losing about 2%. Broad-based commodities did very well, gaining over 1%. Energy-based commodities gained just under 1%.

Some Reading for You

In this post I link to two essays on the Ukraine situation, discussing the options from the viewpoints of Russia in one and the U.S. in the other.

Here’s an interesting article on why most people don’t multitask well but a few people learned how to do it exceptionally well.

Personal privacy is in the news a lot lately. This week I had two posts with different takes on the subject. One is here, and the other is here.

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

March 21, 2014 05:14 p.m.
Your Retirement Finance Week in Review

This week was another of a series of lessons on what investors should ignore. Markets reacted sharply Wednesday after Fed Chairman Janet Yellin’s media conference. She made an off-hand comment that many traders interpreted as indicating a change in the Fed’s plans. Wise investors ignored the reaction, because the comment didn’t amount to anything.

It took a few hours for level-headed people to issue their explanations of why people were over-reacting. After that, markets quickly bounced back from the late Wednesday losses.

It’s a shame that so many investors believe that markets will collapse if the Fed doesn’t continue the extreme monetary policy. The Fed implemented the policy so that it’s debt purchases would offset the deleveraging in the private sector. It’s planning to scale back the asset purchases as the economy inches closer to normal. If the economy falters, the Fed will reconsider. Unlike in the earlier iterations of quantitative easing, the Fed isn’t planning to suddenly stop asset purchases to see how the economy responds. Asset purchases will be reduced only as long as the economy continues recent trends. Continuing tapering by the Fed means the economy is resuming normal functioning and doesn’t need the life support any more.

The recent data support the Fed’s current policies. The economy throttled back from its strong growth in the second half of 2013. That’s too be expected since price increases in stocks and housing are lower, the Fed is pulling back, and growth is slower around the globe. But we do appear able to register growth around 2% as the Fed reduces its role, absent any outside shocks to the system.

The Data

The small amount of data this week focused mainly on manufacturing and housing.

The manufacturing data generally was positive, though not strong. The Empire State Manufacturing Survey was a little better than last month but a little below expectations. Industrial production increased sharply, especially the manufacturing component. This was considered a rebound to normal after the numbers were depressed by bad weather the last couple of months. The same thing happened in the Philadelphia Fed Survey. It had a strong rebound after a large negative reading last month. Again, the turnaround is attributed to weather patterns.

The housing data was more tepid. One problem for housing these days is a shortage of supply. Sales numbers are low because there isn’t a lot of property on the market, according to the surveys. Also, the combination of rising prices and higher mortgage rates over the last year naturally makes homes less affordable than they were a year ago.

The home builders Housing Market Index barely rose after a sharp decline last month. The builders say traffic is down, especially for first time home buyers. This indicates that rising prices are driving away the investors who were all-cash buyers the last few years. The market now depends on those who have down payments and can qualify for mortgages. Housing starts were around expectations and similar to last month. But the report had a big increase in permits, which indicates higher starts over the next few months. Finally, existing home sales declined for the sixth of the last seven months. Inventory of homes for sale is starting to increase, but an average price increase of 9.1% over the last year causes some potential buyers to balk.

New unemployment claims increased slightly, indicating there isn’t much change in the labor market.

The Consumer Price Index rose only 0.1% for the month and 1.1% for the last 12 months. That is well below the Fed’s 2% target and shows that deflation continues to be more of a short-term risk than inflation.

The Index of Leading Economic Indicators from the Conference Board had a nice increase, though five of the 10 components were negative.

The Markets

It was a wild week in the markets, though this week’s closing values weren’t much different from last week’s. Markets generally were affected by news outside the markets: the Russia-Ukraine situation, growth prospects in China, and Fed Chairman Janet Yellin’s media conference.

Emerging market stocks had the best week among the equity markets. They were up 1.6% at one point and down 1.2% at another, but finished with a 0.6% gain. The Dow 30 wasn’t as volatile and closed with about a 0.4% gain. Closing about even for the week were the Russell 2000 Index of smaller U.S. companies and the S&P 500. Lagging the pack was the All-Country World Index with a 0.2% loss.

Long-term treasury bonds were down most of the week but climbed back Friday to close around even for the week. Treasury Inflation-Protected Securities (TIPS) had a terrible week. The Fed’s meeting this week plus the inflation data dampened inflation expectations considerably, causing about a 0.8% loss. At one point TIPS were down over 1%. High-yield bonds had a slight gain, and investment-grade bonds registered a slight loss.

The dollar had a good week, rising 1%. This was partly due to a safe haven reaction to the Russia-Ukraine situation and partly a reaction to the combination of low inflation data and the Fed’s policy announcement.

Commodities had a very mixed week. Gold continued its decline of a couple of weeks, losing 3% this week. It was down almost 4% at one point. Energy-based commodities were flat, closing with no gain. Broad-based commodities declined 1.5%. Recent price increases in coffee and various food commodities were more than offset by sharp declines in copper, gold, and other metals.

Some Reading for You

There were two interesting and educational articles about penny stock scams this week, one in Barron’s (subscription might be required) and another in Bloomberg.com.

I like this article about the art stolen by the Nazis that made headlines a few months ago.

Here’s a good example of the importance of examining data instead of believing headlines.

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

March 14, 2014 06:14 p.m.
Your Retirement Finance Week in Review

It was a fairly quiet week in economic data in the U.S., so investors reacted to other information.

I can’t help think that the mystery of the missing Malaysian airliner unsettled people, though it isn’t mentioned in investment and economic commentary. So, I’ll move on.

China last week announced the first real corporate bond default in some time, of a solar energy company. It also announced some bad data and made clear that it planned to reduce both economic growth and debt levels. These are all good signs. They show China recognizes that recent trends are unsustainable and that it plans to address them in serious and thoughtful ways.

Of course, the situation in Ukraine also is a major influence on investors and markets. As one commentary said, Reagan ended the Cold War, and Obama is resuming it. There’s a new Cold War over mid-European dominance and to a lesser extent, global influence. Investors naturally fear armed conflict as well as economic disruptions caused by sanctions and reductions in free trade.

Also of concern is the potential for direct losses in some investments. If sanctions are imposed on Russia, investors in Russian stocks, bonds, and currency could face losses. About 10% of emerging market funds are invested in Russian stocks, for example. (The exact percentage varies by fund.) In addition, foreign banks face losses on loans to Russian companies. In the short-term, most Russian investments declined in price over the last week, causing substantial losses in Russian, stocks, bonds, and currencies. These losses could be temporary if tensions ease, or they could be the beginning of extended declines.

The Data

Analysts generally agree that, like the January data, the February and even some early March data need to be viewed skeptically because of the severe weather in most of the country. The economy likely is in better shape than most of the data indicate, but it still has slowed from its late 2013 growth rate.

The big news for the week probably was retail sales. They helped spur a lot of the growth in 2013 and have been very weak in 2014. Retail sales were a positive surprise in February. They rose 0.3%, which was above expectations and well above the January decline. In fact, the January number was revised down further. Even after excluding auto sales, retail sales grew 0.3%. That’s positive for now, but it is not a big increase. Incomes need to increase for retail sales to keep growing. Otherwise, we’re likely to continue the recent pattern of several months of growth followed by months of restraint.

Small Business Optimism, as measured by the National Federation of Independent Businesses, declined sharply. The index lagged data from large companies during most of the economic recovery but began improving the second half of 2013. Leading the decline were lower sales expectations. Again this could be due to weather.

Two reports on the labor market indicate its rate of improvement hasn’t changed much. New unemployment claims declined by a small amount, continuing on last week’s sharp decline. That sets the four-week moving average on a downward path, but it still needs to decline a fair amount before reaching the lows of last fall.

Also, the JOLTS (Job Openings and Labor Turnover Survey) also indicated there hasn’t been much change. The number of job openings remains around four million, and hire and separation rates continue to be around 3%. Also essentially unchanged was the “quit rate.” This is the rate at which people voluntarily leave jobs. A higher quit rate is considered a sign of a growing economy. People are more likely to leave a secure job, for either another job or to search for a job, when they are confident of being able to find work.

Consumer confidence at mid-month, as measured by the University of Michigan, declined a couple of points. But the current conditions component of the index increased. The expectations component of the index declined substantially, but the index methodology doesn’t give us an indication of why the survey respondents suddenly are more negative about the future.

Inflation remains more than under control, as measured by the Producer Price Index. It declined 0.1%, again indicating that deflation is more of a risk than inflation in the short term.

The Markets

It was a bad week for stocks. The major indexes I track each were highly correlated this week, with negative returns ranging from 1.5% to 2.25%. Indexes generally were down all five days. The biggest loser was the All-Country World Index. The top index was the Russell 2000, followed by the S&P 500. The Dow 30 and emerging market equities were tied with a 2% loss.

Emerging market equities shouldn’t be viewed a unit over the last few weeks. Asian equities began to stage a recovery and separate themselves from the rest of the asset class until this week. Latin American and emerging European stocks continued to decline.

The dollar declined steadily all week to close with a 0.5% loss.

Bonds had a good week. Long-term treasuries did very well, resuming the bull rally of 2014, and gaining 2.5%. Investment-grade bonds and Treasury Inflation-Protected Securities (TIPS) tied with a gain of about 0.7%. High-yield bonds followed stocks lower, declining about 0.3%.

Commodities diverged this week. Gold surged to a gain of over 3%. But energy-based and broader-based commodities both declined about 0.5%.

Some Reading for You

Most people don’t know much about Social Security but think they do. Read this.

Beware of this scam that some utility providers apparently are using to take advantage of the bad weather.

Here are bad things that can happen when you buy and sell individual bonds. (Subscription might be required.)

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

March 7, 2014 04:49 p.m.
Your Retirement Finance Week in Review

Normally this would have been a big week for the markets because of the economic data that was released. But other events and news surged to the forefront, and economic data moved to the back. The markets weren’t moved much at all by the different releases this week.

This happens periodically. No matter how carefully you lay out a portfolio based on the fundamentals, other events intervene. Economists call these exogenous events, or external events. They are events that are outside the economy, the markets, and individual companies.

The big news this week was Ukraine. Over the course of a week, the government fell, Russian troops occupied part of the country, and a vote on succession was planned. Most other nations objected to Russia’s actions and threatened or hinted at various courses of action. Markets first declined sharply, but then rebounded after it appeared a war involving Russia and the rest of the world wasn’t imminent.

The other exogenous event was the weather. The last few months have seen a lot of economic reports with negative surprises. They were worse than expected. Analysts generally said bad weather was one cause of the poor data. But the Federal Reserve seemed to make it official. The Beige Book summarizing the state of the economy was issued this week, and it repeatedly blamed the weather for most instances of declining or poor economic performance. One financial firm said that the word “weather” was used far more times than in any previous Beige Book.

Sometimes as an investor you’re going to be subject of factors that not only are outside your control but that you didn’t even contemplate when choosing your investments. The good news is that the effects of these exogenous events usually is short-lived. They can affect markets for periods lasting from hours to months, but ultimately economic fundamentals take hold. The best policy usually is to ride out these periods. Just as you can’t anticipate when these events will influence markets, you can’t anticipate when their influence will face. Our approach is to have “sell below” prices that trigger sales of assets if the decline is too severe. Otherwise, we recognize that the effects of exogenous events tend to be fleeting.

The Data

You’ve heard me complain about all the attention paid to the monthly Employment Situation reports. Because of the exogenous events this week, the employment reports were kept in perspective.

The employment data actually was mediocre, but expectations were down this month and the numbers beat the forecasts. Creating 175,000 new jobs would have been a disappointment a month ago but was positive this month. Also the last two months were revised upward by 25,000 jobs. The other key elements of the report were mixed. The average work week declined, but that could be attributed to the weather in February. Average hourly earnings had a nice boost of 0.4%. That’s well above recent trends. If that continues, it will mean higher demand in the economy but also will mean profit margin pressures on businesses.

The unemployment rate rose, but that’s because the work force increase. More people were actively looking for jobs. The labor market is healing, slowly but surely. Next month we’ll probably exceed the 2008 peak for the number of private sector jobs in the economy. But it will be another year or longer before the unemployment rate hits an average or full employment level, and it will be some time after that before the number of jobs hits what it would have been if we’d had normal growth from the 2008 peak.

That’s the theme for the general economy. It’s steadily, slowly healing but a long way from being normal, or what the economists call normalized.

Other labor reports for the week were precursors of the big reports. New unemployment claims dropped sharply. The ADP Employment Report anticipated 139,000 new jobs. That was only a little below expectations, and last month’s number was revised down.

Consumer credit rose in line with expectations, but the details always matter in this report. Use of credit cards declined after a big surge for the holiday season. The increase again was the result of student loans and auto loans. Moderate credit card use is another sign of moderate household demand. That’s why businesses aren’t hiring more or investing more in capital equipment.

The Personal Income and Outlays report required some analysis. It showed an above-expectations and trend increase in spending. Normally that means consumers are more confident and demand is increasing. But this time the increase was mostly in spending on services, and the Department of Commerce says a lot of the increase was due to higher spending on medical insurance and care because of the Affordable Care Act.

Elsewhere in the report, personal income rose above expectations and the recent trends. For the last 12 months, personal income is up 4.1% and consumer spending is up 3.5%. Inflation remains well below the Fed’s target, coming in at 1.2% for 12 months.

There were good increases in both the ISM Manufacturing Index and PMI Manufacturing Index. Both had very poor previous months because of the weather, so these increases should be considered more modest than the raw numbers indicate. Factory Orders, on the other hand, declined, and last month’s negative number was revised downward. Excluding the volatile aircraft sector, capital goods orders increased almost enough to offset last month’s decline.

The ISM Non-Manufacturing Index and PMI Services Index both were down but still were high enough to indicate economic growth. These numbers likely were influenced by the weather. If a service business loses a day or two during the month because of bad weather, that’s going to be a bad month for all service businesses. It’s not the same as a decline because of lower consumer demand.

Productivity increase in the fourth quarter but not as much as expectations. Unit labor costs declined only slightly, but over 12 months unit labor costs declined 0.9%. Productivity and lower unit labor costs are factors that enable businesses to earn record profit margins and continue to increase earnings despite weak revenue growth.

The disruptions from the weather make it difficult to draw firm conclusions about the economy the last few months. But it appears to be growing, though at a slower rate than in the last half of 2013, and likely to continue growing at a modest rate for the first half of 2014.

The Markets

Stock indexes managed a positive week despite all last week’s angst about Russia and Ukraine. Remarkably, despite some variations during the week, the major indexes had almost identical gains. The outlier was the Russell 2000 Index of smaller U.S. companies. It rose about 2.5%. The other major indexes I follow all rose 1.5% to 1.7% for the week: Dow 30, S&P 500, All-Country World Index, and emerging markets.

Bonds didn’t fare as well. They benefited last week from a flight to safety and reversed course after fears subsided. Long-term treasuries lost 2.6%. Investment-grade bonds lost about 1%. Treasury Inflation-Protected Securities (TIPS) did a little better, losing 0.9%. High-yield bonds as usual moved more with stocks than bonds, but they still lost almost 0.5%.

The dollar lost a fraction. Commodities were a mixed bag. Broad-based commodities gained 0.5%. But gold lost about 1% and energy-based commodities lost 1.4%.  

Some Reading for You

You should read a couple of links about the stock-selling abilities of SEC employees.

George Friedman of stratfor.com gives a good review of events in Ukraine.

Howard Marks of Oaktree Capital gave an interview with his investment philosophy and outlook.

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