May 2012

May 25, 2012 04:45 p.m.
Your Retirement Finance Week in Review

These weekly messages don’t often draw attention to a lot of economic data from outside the U.S. But this week was a major one for global economic data.

The first conclusion from the data is that Europe continues to deteriorate. We already knew that Greece was in a depression and the other peripheral nations weren’t far behind. The latest data show the downturn is spreading. Even Germany, which actually seemed to be benefiting from the crisis until recently, turned in some negative data and raised concerns among global investors. A spate of Purchasing Manager Index surveys from Europe were released, and they showed problems throughout the continent now.

Another conclusion is that in China’s the economy continues to slow and at a faster rate than most expected. It began some modest stimulative measures. But it has a range of imbalances that won’t be solved by more stimulus and might be aggravated by it.

There also are problems in Latin America, especially Brazil. These countries are hurt by the decline in commodity prices. Brazil and others are trying to shore up the values of their currencies. India also is having problems with its currency, economy, and stock market.

The U.S. can’t be immune from a global economic stall. The largest U.S. companies, which are the major support for the economy, receive high percentages of their revenues and profits from overseas sales.

This weekend could be interesting for investors. Leaders of the European nations are meeting to discuss the escalating financial crisis. If they come up with some agreement that can be considered at least a temporary consideration, markets probably will respond positively. It’s also possible that the European Central Bank will loosen policy over the weekend and create a new wave of liquidity for the continent. But bad news out of the weekend could increase the pessimism and accelerate the selling of recent weeks.

It’s a holiday weekend in the U.S., but we need to stay posted on what’s happening in Europe.

The Data

The good news in a light week of data was focused on housing. The data there caused many people to see we’re past the bottom. Existing home sales rose above expectations and logged a 3.4% gain for a month and 10% for the last year. The data also showed rising home prices, though this is partly due to a greater percentage of the sales being single family homes instead of lower-cost condos and townhomes. New homes sales reported by builders also rose a bit. The Federal Housing Finance Agency price index showed a 1.8% monthly gain and 2.7% for the last year. Finally, mortgage applications increased, though the increase was due entirely to refinancing applications. Applications for purchased actually declined.

The housing data were positive, but this is the strongest part of the year for housing and the data weren’t robust. They simply were better than the bad data that’s been rolling in for a while. Also, there’s still a lot of shadow inventory believed to be waiting to come on to the market. We’re still bouncing along the bottom of the housing market, and I suspect it will be sometime in 2013 before we establish a firm bottom in sales and prices.

Manufacturing continued to show signs that it is slowing from the high growth rate that supported the last three years of economic recovery. The big number was Thursday’s Durable Goods Orders. The core durable goods number showed a decline, following a decline in April. All areas other than April were down. The Richmond Fed Manufacturing Index showed a positive number but much less than recent numbers. The Kansas City Fed Index was s different story but is an outlier among the recent manufacturing indexes.

The data don’t show a recession in manufacturing. But growth is slowing rapidly and taking away a major support of GDP growth.

To round out the week, initial unemployment claims were flat again. That’s another sign that growth is slowing and the labor market isn’t improving as much as it was a few months ago. Consumer confidence as measured by the University of Michigan index rose again despite the recent problems. It’s at a high since the recovery started. The weekly Bloomberg Consumer Comfort Index also rose, after several weeks of declines.

The Markets

It was a very volatile week for almost all assets this week. Investors responded to news and rumors from Europe and also tried to work in the latest U.S. data.

Let’s start with equity markets. U.S. stocks have a fairly good week. After sliding mid-week, they closed with a 1.5% gain for the week. That gives them a little over a 1% loss over two weeks. Small company U.S. stocks did better, rising over 2.5% for the week and losing a little less than 2% for two weeks. International stocks, especially emerging market equities, didn’t do as well. The emerging markets lost over 1% for the week and 5% for two weeks. The all-country world stock index was about even for the week and down over 3% for two weeks.

Long-term treasury bonds had a wild week. Yields on the bonds hit all-time lows on Monday and Wednesday but gave up ground the rest of the week. They finished with a loss of 0.5%. TIPS also had a small loss for the week. High yield bonds and investment grade bonds also fluctuate a lot, though not always in the same direction. Yet, each finished with a gain of about 0.25% for the week. For two weeks, high yield bonds are down about 2.5%, and investment grade is down about 1%.

Commodities had a bad week while the dollar had another good week, though commodities recovered a bit in the second half of the week. Gold lost about 1%, and energy-related commodities lost 2%. Broader-based commodities lost almost 3%.

The summary of market action for the last few weeks is that strength in the dollar and treasuries are signs of deflation or a flight to safety or both. Equities and other risk assets might be oversold on a short-term basis. But absent a solution in Europe or a turn in the economic data, it’s hard to see that they’re making a bottom.

Some Reading for You

Signs continue to emerge that China’s growth is slowing faster than many believe. For example, read here.

Europe continues to make headlines. One discussion is the extent that capital is leaving Europe. Read about that here. Another issue is how much Europe depends on the bailout programs from the ECB to support it. That is here.

Finally, The Washington Post says there’s good news about misunderstood foods. Read it here.

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

May 18, 2012 04:45 p.m.
Your Retirement Finance Week in Review

There was a lot of U.S. economic data this week, but it really didn’t matter. Even the Facebook IPO couldn’t move markets. Rumors and news from Europe determined market moves. It’s clear that the liquidity and stimulus injected into the global economy by the Fed and ECB last year are fading. Talk of a Greek default or exit from the European Union and the euro are roiling markets and raising the risk of a financial contagion.

Investors want central banks to act again. Central banks are talking tough and resisting action. Europe is in a recession, and emerging economies are recovering slightly from their recent slow down. The U.S. economy clearly is slowing, as I discuss below. There is stress in the markets, and investors need to be cautious and balanced. There’s a good buying opportunity coming but it isn’t here yet. You need to preserve your capital and wait for a margin of safety opportunity in the markets.

The Data

Some important data was issued in the U.S. this week, but the markets largely ignored it because of the European situation. The recent data says the U.S. economy still is growing. But it’s growing slowly and more slowly than it was a few months ago. It looks likely to slow further unless there is additional stimulus provided by central banks and governments. The important question, and one investors can’t really know the answer to, is whether the economy will continue growing very slowly or will slip into a recession. Because of the uncertainty, you need to stay balanced in your portfolios and not try to position yourself for one particular economic or market scenario.

Fears of inflation were put to rest for a while with the Consumer Price Index release. Headline inflation for the month was 0.0% because of falling energy prices. Core inflation, excluding food and energy, was up 0.2%. Both figures were right on expectations. For the last 12 months, headline inflation is up 2.3%, which is less than last month’s 2.6%. Core inflation was the same at 2.3%.

Manufacturing’s been the bedrock of the economy since the bottom in 2009. But the data’s been slowing lately, and this week’s reports were mixed. Industrial production came in stronger-than-expected and much better than last month’s number. But last month’s number was revised from 0.0% to negative 0.6%. Negative revisions often are a sign that growth is turning down and the government estimators haven’t caught on yet. The same held true for manufacturing, which is a subject of the IP report. The Empire State Manufacturing Survey came in with a very strong figure and much higher than expectations. The Philadelphia Fed Survey was the opposite. It delivered a negative number that was well below expectations and last month’s number.

Retail sales, another strong point in the economy the last few years, also was mixed. It came in at expectations with a modest 0.1% growth. This is sharply lower than recent retail sales growth. For some time, retail sales growth has been funded largely by lower savings. Rising stock prices can cause that. But with stock prices down and bad economic news in the headlines, households seem less willing to reduce savings. Of course, at some point reduced savings no longer can fund higher retail sales.

There was positive news on housing during the week. The percentage of mortgage delinquencies declined. The Housing Market Index from the NAHB showed significant improvement, coming in well above last month’s reading and expectations. Despite the builders’ optimism, recent increases in the index haven’t translated into matching higher sales of new homes. New mortgage applications showed a sharp increase, but most of that increase was for refinancing, not purchases. Housing starts were higher than last month and above expectations. Unlike most of the last year, there was a healthy increase in single family homes in addition to the strong apartment house growth.

Initial unemployment claims were the same as last week. This is the second week in a row in the 360,000 to 370,000 after a few weeks of unexpected increases. But we haven’t returned to the below-350,000 level many people were expecting by now. It’s another sign that economic growth has slowed.

The Leading Economic Indicators turned in a negative 0.1% this month. The positives in the report largely were those that are manipulated by the Federal Reserve. Negative factors included new building permits and new unemployment claims. Consumer expectations also declined. Likewise, the Bloomberg Consumer Confidence Index declined, with all three of its components declining.

The Markets

There were very strong moves in the markets this week. As usual in times of fear and crisis, long-term treasury bonds and the dollar soared. The long-term treasury ETF (TLT) gained about 2.5% with steady increases all week. The dollar gained only 0.5%, as measured by the trade-weighted index (DXY), after being up over 1% earlier in the week. TIPs did well, gaining about 0.75%.

Stocks and related investments were pounded. Emerging market equities declined the most, losing almost 5% in one week. U.S. small company stocks as measured by the Russell 2000 weren’t far behind with a loss of 4.5%. U.S. large company stocks declined 3.5%. Even high-yield corporate bonds, which resisted stock market declined recently, lost 3%. Investment-trade corporate bonds also lost value, declining more than 1%.

Commodities didn’t do as badly as equities, a change from recent weeks, though they were very volatile. Gold and broad-based commodities perked up the last two days of the week to register a 2% gain each. Energy-related commodities lost 1%.

Some Reading for You

There’s an interesting story about how one of Facebook’s founders was kicked out and still retained almost 10% of the stock, enough to make him worth $3 or $4 billion. You can read it here.

Is a hard landing taking place in China’s real estate market? Read the report here.

The Ira Sohn Annual Investment Conference usually is interesting. You can read a summary of the major presentations here.

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

May 11, 2012 04:20 p.m.
Your Retirement Finance Week in Review

There were a lot of negative headlines this week and not much economic data, so the headlines dominated market action. JPMorgan closed the week by disclosing a hedging loss of more than $2 billion, which probably is the last thing most investors expected to hear. Chesapeake Energy, which has had a series of bad headlines recently, announced that it had more than $1 billion in obligations that weren’t on its books. Cisco Systems as part of its earnings report disclosed a negative forecast for the rest of the year, saying that global growth is slowing.

Of course, there was a lot of bad news from Europe. I won’t try to list all the headlines or sort them out. The problem that could have and should have been solved two years ago continues to worsen to the point that some historically calm analysts are saying a financial contagion is possible.

Economic data from China didn’t get as much attention as it should have. It shows the country’s economy continues to grow slower than at any time in the last decade except in 2008 during the financial crisis. China is slowing easing out of its contractionary policies and beginning modest expansionary policies. But investors need to worry more about whether China can pull off a soft landing.

The big concerns about Europe are how bad its recession becomes and how much it affects the global economy and the U.S. economy. Likewise, we have to wonder how far China’s slowing will go and how much it will affect others. So far, the effects on the U.S. have been modest but these and other factors have a negative impact on emerging economies.

The Data

The data was very light this week, and there wasn’t much for investors to react to.

The Consumer Credit report was the interesting report of the week. It showed a continuing rise in credit use. This continues the pattern of the last few years of households increasing their spending faster than their incomes because of reduced saving and increased credit use. Consumer credit still is very low compared to history because of very low use of mortgages. But other forms of credit use are increasing.

The issue for investors is whether the recent growth can continue. It clearly is what’s supporting retail sales growth and a big portion of recent economic growth. Looking at the details of the recent report, I think it’s unlikely this level of credit growth will continue without additional policy changes. Most of the recent credit growth is in auto loans and student loans. The surge in auto loans likely is a response to the period in 2011 when sales slowed because of supply problems caused by the Japanese tsunami. Sales that would have been spread over a longer period were bunched in recent months. Student loans mostly now are government-financed. Most households with college students now are using them even if they don’t need them, because they are cheaper and easier to obtain than other loans. The proceeds can be spent on anything. But it’s hard to see how the recent level of growth can continue indefinitely.

The NFIB Small Business Optimism Index was a good-news, bad-news story. The bad news is that the index is about where it was a year ago and still is at depressed levels. The good news is that it improved in some key areas. Important features are that business owners are more optimistic about the future and revenue growth, and more believe they are more likely to be able to pass through price increases.

New unemployment claims were slightly above expectations. The latest reports indicate that April’s surge in claims was temporary. The claims now are back in the 360,000 range and probably steadily inching toward 350,000. This level of claims indicates that unemployment will steadily but slowly decline over the next few years if it’s maintained.

The Department of Labor also released its JOLTS report. This employment report doesn’t get as much media, because it’s a month delayed from other data. But it is far more detailed. It reveals that the rate of firing continues to slow and the rate of hiring continues to increase. It shows continuing moderate growth in employment that, if continued, will slowly whittle down the number of unemployed.

The international trade report had some positive features. Exports increased despite the global economic problems. No one’s sure why, but it could be the international economy is better than the news from Europe indicates or that American manufacturers are more competitive than others. The report also showed an increase in non-petroleum imports. This indicates American consumers still are spending.

The University of Michigan Consumer Sentiment Index rose again, continuing a series of steady rises since last August. That’s the good news. The bad news is it’s just below levels reached in early 2010 and early 2011.

Producer Prices actually declined for the month, falling below expectations of no change. The decline primarily is due to lower energy prices. The core index, excluding food and energy, rose 0.2%, which was in line with expectations.

Overall, the data continue to show a slowly-growing economy that could be at or nearing a peak in growth. Its possible the economy will continue to grow, though at a slower rate than in late 2011. I think it’s more likely that the economy will need more stimulus in a few months to continue to generate much positive growth.

The Markets

It was a losing week for most investments. The risky investments weren’t doing well most of the week. They had a small recovery on Thursday. But JPMorgan’s news Thursday evening took them all down on Friday.

Long-term treasury bonds had a volatile week. They surged through Tuesday on the news from Europe, and then tumbled for a few days. They surged on Friday on the JPM news and finished with about a 1% gain. The dollar also had a positive return of about 0.75%. Other positive returns, with slight gains, were investment-grade corporate bonds and TIPS. High yield bonds had a very small loss.

The biggest losers for the week, by wide margins, were gold with a 3.5% loss and emerging economy stocks with just over a 3% loss. Broad-based commodities lost about 2% and energy commodities lost about 1.5%.

Stocks had a bad week. A surprise is that the riskier stocks, small company U.S. stocks, did the best, closing with a very small loss. The S&P 500 lost about 1% for the week. Emerging economy stocks continue to lag the U.S., losing more than 3%.

Some Reading for You

JPMorgan’s announcement became the big news for the week. If you’re interested in details, the best explanation on The Financial Times’ blog FTAlphaville. The key post with several links is here.

Jeffrey Gundlach of DoubleLine Funds made some presentations recently. I linked to some reports on them on my public blog here.

On the public blog this week I linked to several articles explaining why inflation hasn’t been a problem despite all the Fed’s money printing and isn’t likely to for a while. These are worth your review.

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

May 4, 2012 12:20 p.m.
Your Retirement Finance Week in Review

Thanks to all of you who participated in our latest online investment presentation on Wednesday, “Today’s Big Test for the Global Economy and Central Banks.” Registrants for this webinars continue to increase. You’ll be able to review a replay of it soon at www.tjtcapital.com. I’ll let you know when the next webinar is scheduled. I discuss my webinars in my role as Managing Member of Carlson Wealth Advisors, LLC and its relationship with TJT Capital.

The record sale of “The Scream” this week was a lesson for all investors. The price fetched for one painting plus results of auctions for other artwork and collectibles show investors are fleeing currencies to buy assets and things. This is the result of all the monetary stimulus by central banks and increased debt issuance by governments. People are questionining the future value of paper currencies and are looking to buy things that are likely to hold their value. As I pointed out in the recent webinar, in long-term deleveragings the values of paper currencies tend to decline because of all the money printing. Commodities and things do well over the cycle.

The Data

There wasn’t a lot of data this week and it was mixed again. But negative surprises overwhelmed positive surprises, as they have for about a month. Markets don’t react to whether a number is good or bad. They react to whether it was better than expected (a positive surprise) or worse than expected (a negative surprise). When a trend of negative surprises takes hold, investors tend to be less optimistic and become concerned about a recession or market correction. That’s why the prevalence of negative surprises is important.

The major focus the first week of the year is Friday’s employment report, though I think that is a mistake. It’s based on survey and estimates and historically isn’t very accurate. But investors and economists focus on it.

The labor reports for the week were mixed. The major reports were Friday’s combined payroll and household survey reports. The payroll report showed much less job growth than estimated and than in recent months. It also showed no increase in average hours worked or in average hourly earnings. All are negative numbers and negative surprises.

The household survey actually was worse. The unemployment rate declined, and headlines often pose that as good news. But it declined not because of more job but because more people became frustrated and left the job market. 342,000 people left the work force for the month. In addition, household employment declined 169,000. That’s a decline in the number jobs, not the increase in the payroll report. The household report generally is considered more accurate because the payroll report doesn’t capture what’s happening with small businesses while the household survey does. Overall, it was a negative report.

The ADP Employment Report, which generally covers large, private sector companies, showed less job growth than expected and put a damper on investors for a couple of days. New unemployment claims declined substantially after rising for several weeks. In fact, the previous increases in claims were so significant than the four-week moving average moved higher despite the sharp decline in the latest week. The decline to 365,000 new claims is a solid drop, but a few weeks ago many analysts were expecting that we would be solidly below 350,000 at this point.

There was some positive news during the week. Manufacturing continues to be the economy’s strong point. The manufacturing reports in recent weeks indicated that sector of the economy still was growing, but at a lower rate than recently and than was expected. But the ISM Manufacturing Index came in with strong growth and higher than expected. The best news was that new orders were higher as were exports, despite the problems in Europe and China.

The Chicago Purchasing Managers Index also indicated that manufacturing growth continues, though at a lower rate than earlier this year. The number was below expectations, however, so it counts as a negative surprise.

Contradicting the positive news is that factor orders fell sharply, their sharpest drop in two years. This is a volatile month-to-month number, so we shouldn’t read too much into one number. Good news in the report is that new orders rose.

The personal income and spending report was mixed. Personal income rose more than expected and more than in the previous months. Consumer spending also rose, though a little less than expected and considerably less than the previous month. An important note in the spending report is that sales of consumer durable declined. This includes autos, which have been surging in recent months. A reluctance to buy big-ticket, long-term assets is one of the first signs of a consumer pullback, so this is worth watching. The inflation measure in the report, the PCE, continues to show that inflation is under control and right where the Fed wants it.

There was bad news from construction spending. It was better than the previous month but below expectations. The growth in construction is modest and not doing much to boost the overall economy.

Another negative was the ISM Non-Manufacturing Index. The service sector is the bulk of the economy. Its number came in well below last month and expectations. New orders had their lowest level in six months. The numbers still show growth, but at a slower rate than the last six months.

There was good news and bad news in the quarterly productivity report. Productivity declined, and it declined more than expectations. Productivity has been a key element in corporate profit margins being at historic levels. Companies are able to produce more with fewer workers. A decline in productivity that is sustained means profit margins are likely to decline. Of course, a decline in productivity also could mean that employers re likely to higher more people. The good news in the report was that unit labor costs rose less than expected. This continues to show that employers still aren’t pressured to pay higher wages.

The Markets

The week was negative for most investment assets. The winner for the week was the dollar, with a gain of more than 0.5%. Every other investment asset was even or lost value for the week.

Long-term treasury bonds were about even for the week. Investment-grade investment bonds, TIPs, and high-yield bonds were behind with a small loss. International inflation-indexed bonds did poorly this week, the result of both rising interest rates in Europe and the strong dollar. The ITIP ETF lost about 1.5% for the week.

Commodities also were hammered for the week. They did well for the first half of the week, but then declined sharply from mid-day Wednesday through Friday. Energy commodities did the worst, losing about 5%. Gold lost about 1%, and broad-based commodities lost about 2.5%.

Stocks had a very volatile week, rising Monday, declining Tuesday, and rising early Wednesday. They slid the rest of the week. Emerging market stocks and large company U.S. stocks closely tracked each other and lost about 1.5%. Small company U.S. stocks lost the most, losing almost 3% for  the week.

Some Reading for You

We’re in annual report and quarterly report season, and there are some good shareholder letters to read. Robert G. Wilmers of M&T Bank gives an unvarnished review of the economy, banking, and especially regulatory policy. It’s both entertaining and informative. Martin Whitman of Third Avenue funds wrote a big picture letter this time, contrasting his firm’s deep value, margin of safety approach with other investment styles.