March 2015

Last update on: Oct 01 2019

Topics: Bob's Journal, Retirement Investing, Stock Markets and the Economy

March 27, 2015 05:25 p.m.
Your Retirement Finance Week in Review

I’m going to be in Stamford, Connecticut making two free presentations on April 22. One presentation will be at 10:00 a.m. and the other will be at 5:30 p.m. The topic at each will be Retirement Planning: How to Create and Implement a Successful Plan. The presentations are sponsored by TJT Capital Group, and I’ll be presenting jointly with them. As I said, attendance is free, and the talks will be at 9 West Broad St., Stamford, CT. To register, call 877-282-4609 or visit www.tjtjcapital.com/seminar.

It was another week of mixed economic data and of events outside the markets influencing market action.

As good news and bad news was delivered by the data, markets responded a bit. For the most part, investors reacted to other factors.

The most interesting development this week was from Europe. Greece continues to flounder in its attempts to either comply with the requirements of its deal with European institutions or to negotiate better terms. A number of reports this week indicated that European leaders and most investors now are comfortable with the idea of Greek leaving the currency union. Most no longer worry that Greece’s exit (which would eventually amount to a default on some of its debts) would create turmoil in Europe. They also don’t worry as much that other countries (such as France, Italy, and Spain) will seek special terms on their debts.

News from China wasn’t as comforting to investors. Growth in China recently was reported to be low, and there’s a lot of skepticism about even that rate. China also is undergoing a transition in its government and how it manages the economy. That’s increasing uncertainty.

Military actions in Yemen were especially unsettling to investors. Saudi Arabia took action against the rebels who are fighting the recognized government. That caused a short-term spike in oil and raised concerns that fighting will spread in the Middle East and disrupt oil supplies.

The crash of the Germanwings airliner also unsettled markets until information was released that it wasn’t a terrorist activity.

It’s important not to fall into the common habit of anchoring. That’s when the latest things that happened are considered normal or part of an established trend and then projected indefinitely into the future. Take a look at history. At the end of March 2014, the Dow was down 1.3% for the year. It then turned the corner and returned a positive 9% the rest of the year.

The Data

The third estimate of Gross Domestic Product for the fourth quarter of 2014 was unchanged, indicating an annualized rate of 2.2% in the quarter. Final sales were revised upward somewhat, but other factors were revised down to result in no change from the previous estimate.

Consumer sentiment as measured by the University of Michigan rebounded after February’s decline. This puts consumer sentiment as the second highest level in eight-years, trailing only January’s reading. Consumers clearly are optimistic and feeling better about their prospects than they have in years.

Manufacturing reported a series of weak data, hurt by the combination of weather and the rising dollar. The recent strike on west coast ports also is apparently hurting manufacturing activity.

The PMI Manufacturing Index Flash for the first half of March was the outlier, increasing a bit to a five-month high. The Richmond Fed Manufacturing Index dropped enough to indicate a contraction in activity. The Kansas City Fed Manufacturing Index did the same, but didn’t contract as much. Durable Goods Orders also declined. Even after excluding the volatile transportation sector, orders declined.

The PMI Services Index Flash had another strong increase that brought it back to a six-month high. The non-manufacturing part of the economy continues to do well.

Housing actually had a decent week. Existing home sales increased 1.2% after two very weak months. The 12-month rate is the best since October 2013. New home sales increased even more. Last month’s sales number was revised upward to 500,000 units, and this month was reported at 539,000. That makes these the first two months above 500,000 since Spring 2008. Sale prices declined 4.8%. The FHFA House Price Index said prices increased 0.3% for the month and 5.1% for 12 months.

New unemployment claims declined again, bringing the four-week average back below 300,000.

The Consumer Price Index finally stopped reporting negative numbers, rising 0.2%, though the 12-month change still is negative. After excluding food and energy the annual change is 1.7%. This is prompting several analysts to say inflation has turned a corner, and the Fed should be worried. That helped bring stocks down earlier in the week. But the Fed is likely to stay on hold as long as the dollar is strong, prices are falling outside the U.S., and wage growth is weak in the U.S.

The Markets

Stocks recovered a bit on Friday from four straight days of declines. But it wasn’t enough to avoid stocks’ worst week since January. The S&P 500 lost 2.2%. The Dow Jones Industrial Average declined 2.3%. The All-Country World Index and the Russell 2000 U.S. Smaller Companies Index each lost 1.8%. Emerging market stocks lost about 1.7%.

Bonds didn’t have a great week either. Long-term treasuries lost 0.4%, after being down about 1.6% on Thursday. Investment-grade bonds lost 0.3%. Treasury Inflation-Protected Securities (TIPS) lost only 0.1%. High-yield bonds gained a fraction.

The dollar had quiet week and gained a fraction.

Commodities had a volatile week, spiking on Thursday and dropping on Friday. Gold had the best and least volatile week, gaining about 1.4%. Energy-based commodities were up more than 3% by Thursday but dropped to a marginal loss for the week. Broad-based commodities lost about 0.7%.

Some Reading for You

Here’s how restaurants use science to convince you to eat less and spend more.

This is a discussion of overconfidence in people and how it results in misinformation and bad decisions.

Some analysts say we now should be worried about inflation. Here’s a discussion.

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

March 20, 2015 04:25 p.m.
Your Retirement Finance Week in Review

Investors need to learn not to overreact to the latest news, especially at this point in the economic cycle, in which data tend to be more volatile than in the early stages of a cycle. Investors didn’t learn that lesson this week. We saw very wide swings in markets, and even wider swings in the media commentary. This is an especially good time to avoid market commentary in the financial media.

Investors entered the week convinced that the Fed would raise interest rates or at least state somewhat definitively that it would raise them in June. When the employment reports were issued at the start of March analysts thought that was a sure thing. But a couple of weeks of tepid economic data plus weakness in other economies caused the Fed to hesitate. Stock markets sprang to life when the Fed made minor changes in its policy statement and indicated that higher rates in June were far from a sure thing.

The U.S. economy clearly is slower than it was in late 2014. There are three main sources slowing the economy: the second phase of the oil price decline (discussed in detail in the March 2014 Retirement Watch), bad weather, and the strong dollar. Last year’s elimination of quantitative easing, the expectation of interest rate increases in 2015, and global deflationary trends also are factors.

The weather to the extent it affects economic activity usually defers most activity. Purchases and investment simply occur a few months later. Because of the dollar and oil price decline, manufacturing and industrial production are lagging the rest of the economy instead of leading it the way they did in the early phases of the recovery. But the rest of the economy is doing fine. I don’t think manufacturing or global economic conditions will upset that. So, the economy still is growing though at a slower pace than a few months ago.

The economy isn’t strong enough and inflation isn’t enough of a problem for the Fed to raise interest rates more than a token amount. We do carry a risk that the Fed will raise rates faster than it should, and there’s also a risk that when the Fed finally does raise rates investors will overreact and cause a substantial price decline in many assets. That’s why we’re diversified and somewhat cautious in our portfolios, but we aren’t hunkering down in cash.

The Data

There wasn’t a lot of data this week, but the reports were consistent with recent weeks. The data generally was worse than expectations, but not by a lot in most cases. The economy appears to continue growing but at a slower rate than in the last half of 2014.

We saw that in the two manufacturing reports for the week. The Empire State Manufacturing Survey was at a positive level but lower than last month and than expectations. Industrial Production showed a slight increase in overall activity, though below expectations, and a decline in manufacturing activity. That makes three consecutive months of decline in the manufacturing component.

Two housing reports were week. The Housing Market Index of the National Association of Home Builders declined again to reach an eight-month low. The number still is positive, but in steady decline. The lack of interest from first-time home buyers was the main weakness in the report.

Housing starts declined sharply. There’s strong debate over the extent to which weather was the cause of the decline. Given other housing data, weather has some influence, especially for the big decline in activity in the northeast, but is not the sole influence and probably not the dominant influence nationwide.

New unemployment claims increased by only 1,000. The four-week average still is above 300,000 after the spike in claims over the last month, but this week’s number indicates the steady improvement of recent years is likely to continue.

Leading indicators increased a small amount. This is another indicator of continuing moderate growth over the next six months or so.

The Markets

It was another wild week in the markets, ending with positive returns for most investors.

Most stock indexes had a strong week. Emerging markets led the way with almost a 3.5% gain. The All-Country World Index and Russell 2000 U.S. Smaller Companies Index both gained about 2.5%. The S&P 500 and Dow Jones Industrial Average both lagged, with the former gaining 1.5% and the latter 1%.

Bonds also had a good week. Long-term treasuries gained almost 3%, with most of that coming after the Fed’s announcement. Treasury Inflation-Protected Securities (TIPS) gained about 1.75%. Investment-grade bonds gained 1%, and high-yield bonds lagged with a fractional return.

The dollar had its first bad week in a while, losing 1.5%.

Commodities had a very volatile week. But the three benchmarks I follow closely tracked each other and ended the week with gains between 2.5% and 2.0%. Energy-based commodities lagged with a gain just above 2%. Broader-based commodities and gold tied with gains just under 2%.

Some Reading for You

Here’s an interesting perspective on the California water shortage.

This article shows the latest estimates of how intelligence and mental functions change as we age.

Here’s economist Robert Shiller with his model for forecasting the bond market.

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

March 13, 2015 04:35 p.m.
Your Retirement Finance Week in Review

It’s time to make your plans to join me at the Las Vegas MoneyShow May 12-14. I’ll be there again making two presentations and probably will have a booth to meet any Retirement Watch members who want to stop by. The theme of this year’s Las Vegas MoneyShow is that stock picking is back. The sponsors have pulled together what they think about today’s best stock pickers. Registration is free for my readers. For details, click here.

Investors and analysts are becoming more confused, and you should expect that to continue. It will lead to even more market volatility.

Last week investors started to believe that the economy was stronger than they thought, so the Fed would raise interest rates sooner and faster than they had thought. A better-than-expected jobs report caused these thoughts. Investors have a history of overreacting to the jobs report. They ignore other data for the moment and forget that the jobs report is volatile and frequently revised.

This week, things were different. There wasn’t a lot of economic data. The data that was issued tended to be worse than expectations. For at least a day or two, investors pushed stocks higher before bringing prices down again on Friday.

Investors also now are worrying about the dollar. Since the European Central Bank said it would begin quantitative easing, the euro has collapsed against the dollar to a 12-year low. That’s hurting global U.S. companies by making their goods and services more expensive to overseas buyers. It affected some earnings reports for the fourth quarter of 2014 and is likely to adversely affect more earnings for the first quarter of 2015.

I suspect the weakness in economic data in recent weeks is a result of the weather. Most of you know there was a lot of adverse weather around the country in February. That was bound to reduce economic activity. A lot of that activity will be made up in March, and likely make this month’s data stronger than it should be. Despite the weaker February data, the economy still is growing at a good rate and still appears to be on a sustainable path.

The Data

The Small Business Optimism Index from NFIB increased a bit after a small decline the previous month. It still is below December’s reading, which was a nine-year high. The bottom line is that small business owners are feeling good. One inconsistency between this index and some data is that business owners are reporting difficulty finding qualified people for the jobs they have and anticipate increasing wages in the near future. That’s been the case in this survey for a while, but higher wages haven’t appeared in labor market data.

The major negative surprise of the week was retail sales. They declined after also declining in January. The report overstates the decline in demand and economic activity. As mentioned earlier, the weather in February probably was a major factor. Also, the report doesn’t adjust for lower gasoline prices. Part of the decline was due to lower prices at the pump. Related to that is the strong dollar, which reduced the cost of imported goods. The report means people chose not to spend all the savings, at least not yet. Also, auto sales have been strong in the economic recovery but have been weak in recent months. Auto sales were unusually strong the last few years because auto purchases were delayed in the financial crisis. Now, households likely have caught up with those delayed purchases, so auto sales should be more moderate than in the last few years.

The JOLTS (Job Openings and Labor Turnover Survey) again indicated that the labor market is close to normal. A key factor is that the number of people quitting jobs is back near normal levels. During the financial crisis, people wouldn’t quit jobs because they weren’t confident of finding other jobs.

New unemployment claims continue their recent volatility. They dropped sharply this week and brought the number back under 300,000. Because of a few bad weeks, the four-week average still is more than 10,000 higher than the figure of a month ago.

There’s little sign of inflation. Producer prices declined again. That also makes the 12-month number negative, thanks to the strong dollar and falling commodity prices, especially energy.

Consumer sentiment as measured by the University of Michigan declined. It still is at one of the highest levels in recent years but is well below the peak levels of the winter months.

The Markets

After hitting new all-time highs in February, stocks have given up ground. They had a volatile week that ended with small declines.

The only winner of the week was small company stocks as measured by the Russell 2000 U.S. Smaller Companies Index with a gain just under 1%. Emerging market equities was the big loser with about a 2.3% decline. The other major indexes clustered with losses around 1%: The S&P 500, Dow Jones Industrial Average, and All-Country World Index.

Bonds had a good week. Long-term treasuries led the way with a gain of over 1.5%. They were up about 2.5% at midweek. Investment-grade corporate bonds gained 0.5%. High-yield bonds and Treasury Inflation-Protected Securities (TIPS) each lost about 0.5%.

The dollar had a strong week as the European Central Bank began its bond buying program. The dollar was up almost 3%.

Commodities had another poor week. Energy-based commodities trailed the field with a 5.5% loss. Broader-based commodities lost about 3%. Gold did a little better with a loss of about 1.25%.

Some Reading for You

Here are some estate planning mistakes of celebrities from which you can learn.

Ray Dalio of Bridgewater Associates explains that to invest well you have to think differently.

Morningstar came up with a number of ways to profit from a rising dollar using mutual funds. The first named is the fund recommended in our February issue of Retirement Watch, Tweedy Browne Global Value.

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

March 6, 2015 04:20 p.m.
Your Retirement Finance Week in Review

The big financial news this week probably was the Nasdaq Composite closing above 5,000 for the first time since the tech bubble peak in 2000. That’s right, it took about 15 years for anyone who bought that index at that peak to have their capital returned. Of course, after adjusting for inflation, they’re still waiting to return to even in purchasing power.

There are at least a couple of lessons to learn. It’s something to be considered when today’s popular investment trend is passive or index investing. Buying and holding that index didn’t pay off. Any kind of passive or index investing requires some research and thought. The S&P 500 index has far better returns over this period and better than many active stock investment managers. While buying an index fund for the long term is passive investing for the individual investor, the investment itself isn’t passive. Standard & Poor’s spends a lot resources selecting stocks for the index and moving stocks in and out of the index. They apparently do a better job than those who compiled the Nasdaq and than most equity managers.

Another lesson is that price, or value, matters. It matters a lot. While the media had a good time reminding us of the failed web firms that were popular in 2000 (Pets.com is a favorite.), the weren’t the drivers of the Nasdaq. The firms that powered the Nasdaq to 5000 the first time still are around and doing well: Microsoft, Oracle, Intel, and others. The problem for investors is that the prices of those firms’ stocks were pushed to unsustainably high levels. They were selling at incredible prices relative to revenues, profits, or an other metric an investor wanted to use. Though those firms have continued to grow and increase profits, it took a long time for the Nasdaq to return to 5,000. In fact, many of the companies from 2000 were so highly valued that despite growing profits and revenues their stocks still haven’t returned to their 2000 highs.

The other big news of the week was the monthly employment situation reports. As usual, investors focused too much attention on the reports and overreacted to them. Last month the reports were below expectations and convinced investors that the Fed would wait until at least the fall to raise interest rates. This month the reports were better than expected and convinced people that interest rates will increase no later than June. We’ll discuss the reports in detail below, but I urge you once again not to put too much emphasis on those reports.

The Data

This week’s economic data, like that of the last few months, revealed conflicting trends in the economy. Households and the service sector continue to do well. But the strong dollar and bad weather in much of the country are creating problems for manufacturing.

Friday’s employment situation reports show continuing improvement for households, though the report wasn’t 100% positive. New jobs were 295,000, well above expectations and last month (which was revised down). The unemployment rate declined more than expected, but that also was attributable to another small decline in labor force participation.

Yet, the report wasn’t robust. The average workweek didn’t increase. Also, average hourly earnings increased a tiny 0.1% after a 0.5% increase last month. Longtime readers know that the very low increases in monthly earnings have been a key factor for me. Low wage increases mean inflation isn’t likely to be a problem soon. But it also keeps a lid on economic growth. Surveys of both employers and households, however, indicate that pressure is building for wage increases. It could occur later this year. That probably would cause the Fed to raise interest rates and increase demand, causing businesses to more aggressively hire and invest.

The employment situation reports were inconsistent with two other labor reports for the week. New unemployment claims increased again, bringing the four-week moving average back above 300,000. Also, the ADP employment on Wednesday was below expectations and last month’s number of new jobs created. That reduced expectations for Friday’s reports and probably helped increase the overreaction.

Consumer credit increased again, led by auto and student loans. Credit card use actually declined. That’s no doubt a reflection of lower gas prices. Consumers have more cash and don’t need to put some purchases on their plastic.

The quarterly productivity report didn’t receive enough attention. It revised downward the first estimate of fourth quarter 2014 productivity, indicating that output was down more than originally reported and unit labor costs increased by more than 4% and more than initially reported. Businesses are producing less and paying more to produce each unit. High productivity is important to sustain profit margins and stock prices. The quarterly numbers are volatile, but two quarters of lower productivity are worth paying attention to.

Personal income increased 0.3% for the month, which was slightly better than recent trends but still modest. But personal spending decreased, largely due to lower auto sales and lower gas prices. Inflation also was low as measured by the PCE Price Index.

The services side of the economy is looking good. The ISM Non-Manufacturing Index rose a small amount and indicates solid growth. The employment segment of the index had a healthy increase. The PMI Services Index had a higher increase and also points to higher growth in the service part of the economy. These results are due to lower gas prices and more people working, plus some increase in incomes.

Several manufacturing reports weren’t as good. The PMI Manufacturing Index had a decent increase, indicating higher growth. But the ISM Manufacturing Index declined to the lowest level since January 2014. Factor orders declined again and for the sixth consecutive month.

The weakness in manufacturing while the service sector is doing well shouldn’t be a surprise. The U.S. economy is stronger than the global economy. The rising dollar is reducing exports, especially of manufactured goods. The decline in oil prices is causing reductions in energy production, which leads to manufacturing reductions. Meanwhile, energy and foreign goods are cheaper to U.S. consumers, so they have more money to save or spend on other things.

The Markets

Stocks declined early in the week and were making their way back to even. Then, they decline sharply Friday after the employment situation reports were issued. Emerging market stocks fared the worst, losing about 3.5%. The All-Country World Index and Dow Jones Industrial Average each declined about 2%. The S&P 500 lost about 1.8%. The Russell 2000 U.S. Smaller Companies Index lost 1.5%.

Bonds also didn’t have a great week. Long-term treasuries led the way down with almost 4% loss. Investment-grade bonds and Treasury Inflation-Protected Securities (TIPS) each lost about 1.5%. High-yield bonds lost 1%.

The dollar had another good week, gaining 2.5%.

Gold tumbled, losing about 3.75%. Broad-based commodities lost about 2.5%. Energy-based commodities lost about 1.25%.

Some Reading for You

Here’s a story about the messy estate plan of the founder of the Benihana restaurant change.

You should choose the executor of your estate carefully. Here’s why.

This mutual fund buys and holds forever, buying equal shares of each stock, and it’s been doing well.

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