May 2013
May 31, 2013 04:30 p.m.
Your Retirement Finance Week in Review
This was a very volatile week in the markets, and it looked like investors were looking for excuses to take profits in some assets that did well in recent months. Japanese stocks took a big dive on Tuesday and again on Friday. This came after substantial gains since last fall. U.S. Treasury Bonds also took a big hit this week, which continued losses from earlier in the month.
No significant news accompanied either decline. We’ll keep monitoring to see if these are some month-end portfolio shifts or longer-term trends. Those following our Invest with the Winners strategy should have sold their iShares-Japan fund. In our Retirement Paycheck strategy, we have a sell signal of $18.50 for PIMCO Corporate Income & Opportunities. While the fund fell below that price intraday this week, it hasn’t closed below it. So the fund remains in the portfolio. None of our other recommended funds are approaching sell signals, in fact several funds appreciated while investors fretted about so many investments losing value this week.
Let’s look at the details for the week.
The Data
It’s clear that the fiscal tightening had some negative effects on the economy. We’ve expected this all along and pointed to it in data over the last couple of months. This week’s data makes clear that there was an effect but so far it hasn’t been enough to bring on a recession. My expectation is that we’re close to being through the worst of the tightening’s effects, the private sector is adjusting, and growth will return to it higher rate later in the year. But the growth rate still is likely to be slower than the long-term average.
The big report this week was the second estimate of first quarter GDP. The annualized rate dropped a notch below the first reading and expectations. But it still is a marked improvement over the fourth quarter of 2012 and a decent 2.4% rate. The details of the report aren’t great. A lot of the growth is from a change in inventories, which is more of an accounting change and doesn’t indicate strong growth. The good news in the report is that inflation as measured in the report is under control.
Another sign of slower growth is the Personal Income and Outlays report. Personal income was flat over the month, and consumer spending declined for the first month since May 2012. Both were below expectations. So, far at least the latest month, consumers stopped being willing to reduce savings further to continue increasing spending. That could be households taking a breather after fairly steady spending increases over recent months. Or it could be either a new household austerity or a reaction to a softening in household income. We’ll need a few months of consistent data.
The report also should inflation as measured by the PCE is under control. In fact, taking together all the inflation reports of the last two months together, deflation is a much greater risk to the economy now than inflation. While the markets are concerned about the Fed reducing its stimulus efforts, the inflation data coupled with the weaker economic numbers make it more likely the Fed will continue or increase its efforts.
In contrast to some of the other disappointing recent economic data, consumer and household sentiment continues to increase. Friday’s Consumer Sentiment as measured by the University of Michigan rose to the higher level of the recovery and was a sizeable jump over recent months. Likewise, Consumer Confidence as measured by the Conference Board rose sharply and to its highest level in the recovery. Higher home prices, higher stock prices, and gradual improvement in the job market seems to increase optimism among consumers and explains why, until the latest month, spending steadily increased.
Related to that, the Case-Shiller Home Price Index rose another 1.1% to bring the 12-month appreciation to 10.9%. Four months of 1% or greater price appreciation is the strongest run since the tail days of the boom in 2005. The pending home sales index, however, showed less of an increase than expected, which Realtors blamed on a limited supply of homes to sell.
Manufacturing continues to be weak. Regional reports from Fed banks in Richmond and Dallas indicated another month of weakness. But the Dallas report did have indications manufacturing there is likely to improve in coming months. The Chicago PMI Index, which purports to give a picture of the overall economy in the Chicago area, countered the trend and last month’s number by being sharply positive. We’ll have to wait to see if this is an outlier due to some sampling problems identified by some analysts or a reversal of trend.
A couple of other reports showed weakness in the business sector. Corporate profits as measured by the Bureau of Economic Analysis actually declined an annualized 7.9% in the first quarter, to make the 12-month growth in profits only 4%. New unemployment claims unexpectedly rose above last week’s number. But the number still is in the recent range of around 350,000.
The Markets
There was a lot of action in the markets this week.
The big action was in long-term treasury bonds. Monday was quiet, but yields rose sharply on Tuesday. Wednesday and Thursday were steady, but the bonds dropped again on Friday. Long-term treasuries lost about 3% for the week. Bond interest rates increased most of May and are at the highest levels in more than a year.
We had a false start in higher yields early in 2013, but it quickly reversed course to bring yields to very low levels in April. I don’t think rates will go lower than April’s levels, barring a serious recession, and the long-term bull market is over. But the recent rise in rates is too far, too fast. I think it’s an overreaction to and misinterpretation of comments made by the Fed officials recently. Investors sold treasuries thinking the Fed was about to change its policy.
To get a better gauge of what’s happening in bonds, we need to look at other assets. The dollar had a pretty good week, generally rising when treasuries declined. The dollar finished the week with a marginal loss. Investors also were selling high-yield bonds and investment-grade bonds during the week. They lost 1.75% and 1.8%, respectively. So, it appears there was a general rotation out of bonds but not out dollars.
One place dollars flowed to was U.S. stocks until late Friday. The Russell 2000 small company index rose about 1.25%. The Dow 30 and S&P 500 each were up about 2% earlier in the week but closed on down notes with marginal gains for the week. The U.S. stock indexes rose sharply while bonds were falling on Tuesday. International stocks, on the other hand, didn’t do as well, led by the sharp decline in Japanese stocks. Emerging market stocks lost about 2%, while the All-Country World Index lost about 0.75%.
Commodities didn’t do as well. Gold had a volatile week but closed with a small loss. Broad-based commodities lost 1.25%, while energy-based commodities lost slightly less.
Some Reading for You
How much will you spend on retirement medical expenses in retirement? Here’s the latest estimate.
Many people don’t estimate their retirement spending properly. Consider this survey.
Here are one observer’s notes on a presentation about PIMCO’s new secular outlook for the economy and markets.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
May 24, 2013 04:30 p.m.
Your Retirement Finance Week in Review
Thanks to the Retirement Watch members and others who came to the Las Vegas MoneyShow and introduced themselves. I’m always glad to meet my readers, hear their stories, and listen to their comments. My workshop was standing-room only and received good reviews. I’ll let you know when my next appearance is scheduled.
The past two weeks were quiet until the last few days. The big news was the correction in Japanese stocks, declining about 7% in one day. This was an overdue correction, since Japanese stocks have been rising steadily since last fall. They were up about 25% year to date before the drop. The decline apparently was triggered by a sharp rise in interest rates on Japanese bonds and news of slower growth from China. The Bank of Japan I suspect will step up its bond buying to keep interest rates low. Investors generally were looking for a reason to take some profits after the long rise. I believe this will be a minor correction in an extended rally.
The other major news was Ben Bernanke’s congressional testimony. A number of investors misinterpreted his statements, I think, triggering declines in stocks and bonds. Bernanke drifted from previous comments by saying the Fed might decide to reduce easing “within a few meetings.” Too many people interpreted that to mean the Fed will tighten policy and raise rates. All if really means is that if the employment market continues to improve at its recent pace then sometime in late 2013 or early 2014 the Fed might reduce the amount of bonds it purchases each month. It is not going to tighten monetary policy or raise rates for quite some time. And if it does reduce easing, it will reverse that move if the economy stumbles.
The economic data and market action for two weeks generally re-enforce existing trends. The economy continues to grow but at a slower pace than late in 2012. At the same time, U.S. stock indexes continue to rise, commodities decline, and bonds trade in a range. Let’s take a look at the details.
The Data
Consumers and households appear to be holding up in the face of higher taxes and the federal spending sequester. Retail sales grew modestly, despite a decline in gasoline prices, and were above expectations and last month’s figure. After excluding autos and gasoline sales, retail sales increased a solid 0.6%. This indicates consumers are increasing their discretionary spending. These are volatile numbers, so we can’t be sure of a trend yet.
One note of warning came from recent earnings reports by retailers. They generally reported sales below expectations or issued warnings about sales in the next few months. That could mean consumers have reduced savings as much as they are comfortable with and future growth in retail sales will depending on higher employment and incomes.
Consumer sentiment as measured by the University of Michigan rose an unexpected strong amount. This brings sentiment near the post-2008 high reached last November.
The positive news from households is attributable to positive recent news from housing and the labor market. Yet, the latest reports from these sectors weren’t uniformly good.
The Housing Market Index from the National Association of Home Builders rose and was in line with expectations. In related news, housing starts declined and were below expectations. But new permits rose sharply, hinting at a potential turnaround. The Index still is below 50, which is considered to be pessimistic and is below the recovery highs of 47. But the six-month outlook is above 50, indicating improvement is expected over the summer. There still are problems, however, with limited supply and low potential buyer traffic. But keep in mind that new homes are fighting against existing homes, which still offer depressed prices from defaults and foreclosures.
In fact, the existing home sales rose 0.6% for the month, and single family home sales rose 1.2%. The 12-month change is 9.7%. The inventory of existing homes for sale rose, and selling prices increased by 4.8%, the highest monthly increase in the recovery. A word of warning is that mortgage interest rates rose for three weeks in a row. A continuation of that could bring a halt to the increase in home sales and prices.
There was even more housing news this week. The FHFA House Price Index rose and was above expectations. New home sales also rose and were above expectations. The price of new homes sold rose by 8.3% for the month. This data is at odds with the survey of home builders, so the market might be better than home builders say it is. Home builders might be more pessimistic because they are hampered by credit conditions that make it difficult for them to increase the inventory of new homes for sale.
Small business saw some improvement as measured by the Small Business Optimism Index from the National Federation of Small Business. It rose but still is below the historic average of 100 and at normal recession levels. Small businesses have been lagging the economy and large businesses for a host of reasons and are the main reason economic growth is so low. But unlike in the post, sales expectations and hiring plans were positive.
Manufacturing continues to downshift modestly. There really weren’t any positive points in the Industrial Production report. Overall production and manufacturing were down and well below expectations. None of the components were positive. Manufacturers clearly are feeling the growth reductions in Europe and Asia.
The trend was re-enforced by most of the regional reports. The Empire State Manufacturing Survey fell in the face of expectations for higher growth. There wasn’t much positive in the report. The Philadelphia Fed Survey was worse. While these two reports have been weaker than national and other regional surveys, the extent of their declines this month could indicate a ratcheting down in the national economy. Yet, the Kansas City Fed Manufacturing Index increased and was well above expectations. But even that modest increased wasn’t all positive. The report revealed reductions in backlogs and in hiring plans.
Durable goods rounded out the manufacturing report with an above-consensus increase after last month’s sharp decline. It was not a strong report, just better than last month’s and expectations. Overall the report indicates modest growth.
New unemployment claims rose last week after a sharp drop the previous week. That pushed the level to the highest point since late March and also was enough to increase the four-week moving average. But they declined substantially again this week, and the four-week average also fell.
There was positive news on inflation. In fact, deflation is more of a risk than inflation these days. There was a monthly decline in headline inflation (deflation) and a modest increase in the core CPI. For 12 months, the CPI is less than 2%. Producer prices delivered similar numbers.
Good news is that the Leading Economic Indicators rose more than expectations. A range of factors caused the increase, with only the recent lag in manufacturing holding back the LEI.
The Chicago Fed National Activity Index tries to capture economic trends through an index of 85 monthly economic indicators. The Index declined for the second month, and the three-month moving average is slightly negative. Another month or two of this trend, and the Index will be signaling major weakness in the economy.
The Markets
Last week was a good one for investors in developed stock markets, and this week started to look good as well. All that changed with the dual events of Japan’s stock slide and remarks from the Fed interpreted as being hawkish.
No stock index had a positive return for the latest week. The closest with the Dow 30, with a nominal decline. The S&P 500 lost more than 1%, and the Russell 2000 Index of small U.S. company stocks lost about 1.25%. The All-Country World Index lost about 1.75%, while emerging market stocks brought up the year with a 2.5% loss.
Bonds also didn’t have a good week as interest rates rose. Long-term treasury bonds were down about 1.4% at one point but recovered some of that to close the week with a 0.6% loss. High-yield bonds did the worst with a 0.75% loss. Treasury Inflation-Protected Securities (TIPS) lost about 0.6%, and investment-grade bonds lost about 0.5%.
The dollar was strong early in the week but closed with a loss of about 0.5%. Gold bounced around a lot but generally had a good week, closing with a 2.25% gain. It was the big winner and almost the only winner for the week. Broad-based commodities had a nominal gain, while energy-related commodities lost over 1%.
Some Reading for You
Were the financial bailouts and quantitative easing primarily to benefit foreign banks? This report says yes.
Interested in index annuities? Read this solid review.
You no doubt see a lot of negative analysis about the stock market. Here’s a counterargument.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
May 10, 2013 04:15 p.m.
Your Retirement Finance Week in Review
First, a brief housekeeping note. I’ll be traveling most of next week. There probably won’t be an update for the week or only a brief one. I’ll be back the following week with the regular schedule.
This was a very quiet week for both the markets and economic data. Let’s take this quiet period to discuss an issue that’s confusing a lot of investors: the dollar.
With the Fed pumping money and the federal deficit and debt exploding, people don’t understand why the dollar isn’t collapsing. There are a few reasons for this.
First, the dollar isn’t falling for the same reasons inflation isn’t soaring. Most of the people who expect the dollar to collapse also expected high inflation by now. You have to remember that we’re not in a typical economic environment. We’re in a deleveraging. Because people took on too much debt during the boom, they’re not responding in the usual ways to the Fed’s policies. Instead, they’re trying to reduce debt and keep spending under control.
Low interest rates and a lot of money aren’t enough to encourage people to buy and spend. Inflation isn’t going to rise, and bring the dollar down, until people borrow and spend enough to push up prices. The Fed’s policies are barely enough to offset the effects of this deleveraging process. We can see this in various data, such as the low velocity of money and low rate of new debt. We’re more at risk of deflation in the near term than inflation. You can see that in the recent declines in gold and other commodities.
Second, the dollar only declines relative to something. Japan and the U.K. and engaging in policies similar to the Fed’s. Europe is an economic mess. There aren’t too many currencies that are managed any better than the dollar. In addition, the U.S. has one of the better economies in the world, and its stock markets also are topping global rivals. So, international capital is attracted to the U.S. and the dollar because of greater opportunities.
There are a lot of moving parts in currency markets. You can’t look at just one factor, such as monetary policy, and assume a currency’s value will move accordingly. Because many people don’t understand the difference between an economy in a long-term deleveraging and a normal economy, they’ve been expecting higher inflation and a lower dollar for about five years. They’ve been disappointed and will continue to be disappointed for a while.
The Data
There wasn’t much data for the week. Perhaps the most important data was the report that mortgages in default continue to decline and are back to pre-crisis levels. This means the downward pressure on home prices is greatly reduced. With home prices rising rather than falling, fewer people are under water with their mortgages. A modest additional increase in home prices will lift millions of homeowners back to positive territory. That would provide a boost to consumer confidence.
The other major report was consumer credit. It repeats the story of the last couple of years. The credit markets and household balance sheets are healing, though slowly. Consumers are willing to borrow for major purchases such as autos and student loans. We still aren’t seeing heavy mortgage borrowing or credit card use. It’s another indication the economy is growing but slowly.
New unemployment claims declined again, bringing us to another post-crisis low. The new claims still are 323,000, which historically isn’t great. The labor market basically is at a stable point. Employers aren’t letting go a lot of workers, and not many workers feel confident enough to leave their jobs in hopes of finding another. Employers also aren’t willing to hire many new workers.
That’s it for this week’s major data.
The Markets
It was a positive week for stocks across the board, but U.S. stocks did better than international counterparts. U.S. indexes had their third straight week of positive returns. The Russell 2000 Index of small U.S. company stocks did best with a return just under 2%. The S&P 500 and Dow 30 both returned right around 1%. International stocks as measured by the All-country World Index returned about 0.75%. Emerging market stocks had the worst week, gaining a fraction.
Commodities had a mixed week. Gold did worst. It was stable most of the week but fell sharply Thursday and Friday. It closed with a 2% loss. Energy-based commodities did best, but they still managed only to break even. Broad-based commodities lost about 0.75%.
It wasn’t a good week for bonds, with all the major bond categories losing value. It might be because Bill Gross of PIMCO said that interest rates reached their low at the end of April and the long bull market was over. He didn’t forecast an immediate bear market, but said don’t expect to see lower interest rates generating capital gains for bond investors.
Long-term treasuries did the worst, losing 2.2%. They were stable most of the week but dropped sharply on Thursday and Friday. High-yield bonds, which are more likely to follow stocks, lost about 0.5%. Treasury Inflation-Protected Securities (TIPS) lost fractionally more. Investment-grade bonds lost about 0.75%.
The dollar, despite the treasury bond losses, gained over 1%. Much of the gain was against the yen, which is falling because of the Bank of Japan’s recent easing policy.
Some Reading for You
If you want some details about hybrid policies that combine long-term care with annuities or life insurance, read here.
The government finally is releasing information it has on hospital charges. It’s surprising. Read here.
Retired basketball great Kareem Abdul-Jabbar wrote 20 things he wished he known when he was younger.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
May 3, 2013 04:45 p.m.
Your Retirement Finance Week in Review
Central banks were back to dominating investment news this week.
First, the Federal Reserve held one of its regular meetings. Its statement after the meetings made only a few changes, but they were relatively important. The Fed acknowledged that growth slowed a bit recently, and that reduction in growth is due to fiscal tightening (tax increases and the sequester spending cuts). As it has for some time, the Fed is all but begging Congress and the administration to develop pro-growth fiscal policies.
Second, the Fed stated that its policy of buying up to $85 billion of bonds and mortgages each month remains in place. In fact, the statement hinted that the monthly purchase could be increased if the economy slows further.
Next up was the European Central Bank. It lowered interest rates, which is not significant. It’s more of a symbolic action than real action. President Mario Draghi also had soothing words. He said monetary policy will be easy for as long as needed and the ECB will lend banks as much money as they need until at least mid-2014.
The ECB isn’t going to take action anything like the Fed or the Bank of Japan are taking. But at least it’s not going to withdraw liquidity and might engage in some kind of quantitative easing if things really deteriorate again. In short, the ECB takes off the table a liquidity crisis such as occurred after the Lehman Brothers bankruptcy but also ensures that Europe will remain mired somewhere between a depression and recession for quite some time. It appears that the ECB will engage in significant monetary expansion only if Germany tumbles into a recession.
The Data
As is usual for the week that contains the first of the month, several reports about the labor market and incomes were issued.
The most-watched is the Employment Situation report, which actually is several reports and is overhyped. It generally came in better than expected, so investors bid up stock prices. Perhaps more important than the 165,000 new jobs reported, is that the number of jobs for the previous two months were revised sharply higher. (That’s why the report is overhyped; revisions to the original report can be dramatic.) Private payroll expansion was better. Losses in government payrolls pulled down the overall number. Also positive is that wages rose in line with expectations after being flat last month.
The only negative in the report is that the workweek declined a bit from 34.6 hours to 34.4 hours.
Earlier in the week, The ADP Employment Report disappointed analysts with a gain of over 119,000 jobs for the month. The New Unemployment Claims report, on the other hand, was positive. New claims declined to 324,000, which is a new low for the economic recover since 2009.
Overall, the reports indicate a slowly improving labor market. Major layoffs aren’t a big problem, but employers aren’t knocking each other down to bid for new workers and boost wages.
The quarterly productivity and costs report was a mixed bag. Productivity increased after a sharp drop last quarter, but the increase was a little below expectations. Productivity is what allows businesses to increase profit margins by generating more from each worker. Unit labor costs also increased above expectations, which could be another warning sign about profit margins. On the other hand, it could mean businesses will have to begin hiring because they’ve squeezed all they can out of current workforce levels.
The monthly Personal Income and Outlays report was an interesting one. First, it showed that inflation as measured by the PCE Price Index is under control. In fact, there’s more of a threat of deflation than inflation in the near term. Whether you look at core inflation or broader inflation, it’s only about 1% over the last 12 months and around 0% for the last month.
In addition, personal income continues to grow at a moderate rate. The latest month’s growth was less than the previous month’s and lower than expectations, but it still was growth. Over the last year, income growth was 2.5%, which is consistent with overall economic growth.
But households continue to spend at rates equal to or faster than income growth. Because of the improving labor market and rising asset values, they’re comfortable reducing savings in order to spend. But households still aren’t borrowing much to spend, certainly nowhere near the rate they borrowed in the 1990s and early 2000s.
The combination of these factors means the economy is going to continue its recent slow rate of growth. We’re in a bumpy patch as the economy absorbs the tax increases and sequester cuts. But after that should resume a growth rate of 2% or a little higher. But businesses aren’t likely to invest in additional employees or equipment until demand consistently exceeds 2% growth. So, we’re stuck in this modest, low inflation growth economy for a while, with short-term ups and downs.
The Employment Cost Index also indicated household income growing at least than 2% annually. It did show non-benefit wages and salaries growing a bit higher than usual, so that could indicate that personal income growth might increase over 2013.
Only a couple of housing reports came out this week, but they were important for investors. The Case-Shiller Home Price Index showed a monthly increase of 1.2% and a 12-month increase of 9.3%, which is the highest 12-month rate since May 2006. This is consistent with other recent data and shows housing continues to recover from its bottom
