May 2015
May 29, 2015 04:15 p.m.
Your Retirement Finance Week in Review
There wasn’t a lot of news in this holiday-shortened week. It is a good time to review some remarks Jeffrey Gundlach of DoubleLine Funds made in his May 12 conference call.
Gundlach said most of the analysts who appear in the financial media, especially CNBC, are wrong and not to be relied on. He was especially harsh about those who interpret interest rate changes. While the stock market might want the Fed to delay raising rates, Gundlach says the bond market, at least the long-term treasury portion of the bond market, wants the Fed to raise rates. As he puts it, “The bond market, in its cynical self, wants a depression.” A weak economy is good for bonds.
He said interest rates rose when the Fed was doing quantitative easing, and European rates are higher now than before the European Central Bank started its quantitative easing.
You could see that reflected in this week’s market activity. There were several signs of weakness in both the U.S. and globally. Interest rates declined and pushed long-term treasury bonds higher.
The economy was growing at or above its long-term average a couple of months ago. Recent data indicate it probably slowed further during the spring. The data don’t give a clear indication of whether this pause is temporary or a pause before growth increases a notch or two. Unlike most, we’re not going to try to predict. We’ll invest along with current trends until we have clear indications they are changing.
The Data
Last week’s Consumer Price Index report caused a commotion among those who didn’t read it closely. There was a rise in month-to-month inflation. That caused some analysts to say that inflation is ready to rise rapidly, and the Fed will have to raise interest rates. A closer reading of the report says otherwise. First, a good part of the recent rise in inflation is from oil bouncing above its recent low prices, and the dollar retreating a bit from its highs. We’re not going to see a sustained rise in oil or a fall in the dollar. Second, another part of the CPI’s increase is from rising apartment and home rentals. Many people still can’t afford or qualify for home mortgages. Also, the number of households is starting to increase again after years of consolidation following the financial crisis. Housing is a large chunk of the CPI and is measured by monthly changes in rents.
When the rest of the inflation report is examined, it is clear that in other areas, there isn’t much price pressure. There also aren’t many trends that are likely to push prices higher. The strong dollar, weak global economy, low commodity prices, globalization, and high global debt levels all are more deflationary than inflationary. The only real inflationary force in the world is central banks keeping rates low and money readily available. Those efforts are just strong enough to balance the deflationary forces.
The housing market is off to a good start in the spring, according to the latest reports. The only weak report was the FHFA House Price Index. Prices in the last month rose less than last month and below expectations. Year to year price increases were 5.2%. But the S&P Case-Shiller Home Price Index rose 1% for the month. Its 12-month rise was 5%.
New home sales also were strong, well above both expectations and last month’s level. Prices also rose 4.1% for a 8.3% 12-month price gain. Pending home sales delivered their fourth monthly increase and were well above last month’s level.
The housing market is recovering from the slow down it had in 2014 and in good shape. Keep in mind all the numbers still are well below the pre-crisis peaks, and the housing market still can be considered to be at depression or near depression levels. So, there is little worry of the recent surge being a bubble.
The latest manufacturing reports indicate that sector of the economy might be stabilizing. The sector’s been declining because of the commodity price decline, the strong dollar, and weak global growth. The Dallas Fed Manufacturing Survey continued to be very weak, reflecting that region’s dependence on energy and commodities. The Richmond Fed Manufacturing Index showed a slight increase after two months of declines. Durable Goods Orders showed a decline in the headline number. But after subtracting the volatile transportation sector, it showed a good increase, and last month’s number was revised from a decrease to a strong increase.
But the Chicago Purchasing Managers Index declined sharply for the last month and is below 50, a sign of contraction in that portion of the economy. The report tracks all sectors of the Chicago area economy, not only manufacturing. This report is very volatile, so we’ll have to wait a few months to determine if this is an outlier or an indicator of a slower economy to come.
Nationally, there’s lower growth in the services sector, according to the PMI Services Flash Index. It came in at the lowest reading since January.
Consumer confidence remains strong. It is lower than the very high levels of the start of the year but now appears to be stabilizing at still-high levels. Consumer sentiment as measured by the University of Michigan increased a bit after a slump in the mid-month reading a couple of weeks ago. It is not back to the recovery highs of early this year, but it is in solid territory.
New unemployment claims increase a small amount. The four-week moving average still is well below 280,000.
I’ll discuss the GDP report last, because it is old news, describing the first quarter of the year and prone to revisions. This was the second estimate of first quarter GDP and was revised down from the first estimate. The new estimate indicates the economy declined in the first quarter. There were not major surprises in the report. The areas of the economy that were weak in the first estimate were reported to be even weaker because of updated data. The economy clearly bounced back in the second quarter, the key questions are how much did it recover and how long will that last?
The Markets
Stocks were down all of the holiday-shortened week. Emerging market stocks fared worst because of sharp declines in China-related stocks. Major sovereign investment funds in China announced they had sold or were selling shares in two widely-held companies, and that spurred selling across China’s markets. The emerging markets index was down over 3.5% for the week, closing at its low point. The All-Country World Index declined more than 1.5%. The Dow Jones Industrial Average lost more than 1%, while the S&P 500 and Russell 2000 U.S. Smaller Companies Index each lost slightly less than 1%.
Bonds did better. The long-term treasury gained about 2.5%. Investment-grade bonds gained 0.6%. Treasury Inflation-Protected Securities (TIPS) gained 0.4%. High-yield bonds gained 0.2%.
The dollar gained almost 1% but was up almost 1.6% early in the week.
Commodities lost heavily early in the week but gained back some of those losses on Thursday and Friday. Broad-based commodities fared the worst, losing almost 2.5%. Energy-based commodities were down 4% at mid-week but closed to match gold’s loss of just over 1% for the week.
Some Reading for You
Here are tips to have a productive summer grilling season.
Here’s a good analysis of recent home price trends.
This post summarizes the recent manufacturing reports.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
May 21, 2015 04:25 p.m.
Your Retirement Finance Week in Review
I enjoyed meeting many of you at the Las Vegas MoneyShow last week and for your positive responses to my presentations. I’ll be at the San Francisco MoneyShow next, making two presentations on Saturday, July 18.
The markets were fairly quiet the last two weeks and have reacted mostly to news from outside the markets. Though the markets were relatively quiet, new highs were reached during the week in both U.S. and Chinese indexes.
Earnings season is over for the first quarter and was better than expected. Analysts in general expected a 5% decline in earnings from last year, but they instead increased by 0.5%.
The big news was Tuesday’s announcement by the European Central Bank that it would increase its bond purchases in the next few weeks. This caused a rally in the markets. The European economy and markets had been slowing a bit. The excitement over the previous announcement by the ECB was waning. Perhaps most disconcerting to the ECB was that the euro was rising against the dollar. The announcement reversed those trends.
China again had announcements about new attempts to stimulate its economy. China’s been trying to make major changes in its economy, shifting resources from over-indebted and state-run enterprises to other parts of the economy. It also is trying to stimulate the economy following its recent reduction in growth.
The Fed also stepped in with the release of the minutes from its last meeting. Those minute revealed that the consensus among the voting members was that the Fed shouldn’t increase interest rates in June because of slower economic growth and the strong dollar. That helped bond prices.
An interesting piece in The Wall Street Journal this week by Simon Nixon argued that there is less liquidity in the markets than there used to be. This is resulting in less trading, which we see in market trading volume. But it also could mean problems in the next downturn. Post-crisis regulations sharply reduced the role banks could play in markets and the investing they could do. The result is there are fewer market makers and fewer big investors who are willing to take part in a large trade so that market prices aren’t distorted. “A year ago, you could trade $280 million of U.S. Treasuries without moving markets; today it is closer to $80 million, according to J.P. Morgan,” says the article.
Here’s more:
One major European bank has cut its European government-bond trading book by 75% since 2010 and now quotes daily prices for just 900 corporate bonds compared with 5,000 precrisis, according to a senior trader. Even the giant U.S. Treasury market isn’t immune: Trading volumes have fallen by 10% even as the market has tripled since 2005, while the proportion of outstanding bonds held by dealers has plummeted to 4% from 15% precrisis, according to Deutsche Bank research.
Recent violent swings in European government-bond markets show what can happen when there is a shortage of capital to stabilize markets. In the past month, the German government-bond market has experienced seven of its worst trading days in the past 15 years. This follows similar episodes in U.S. Treasuries and Japanese government-bond markets in 2014 and 2013.
A separate article in the same issue of The Journal said central bankers, especially Mark Carney of the U.K., say that reduced liquidity is deliberate and market participants need to adjust for it.
What this means is that in the next bear market or crisis prices for some assets could fall quite rapidly, because there would be few buyers available.
The Data
There wasn’t a lot of data the last two weeks, and much of it focused on either housing or manufacturing. Both sectors had mixed reports.
In housing, new starts and permits surged 20.2% from last month and was one of the largest monthly increases ever. Both the starts and permits numbers were the best in seven years or longer. The moves were unexpected. But the Housing Market Index from the National Association of Home Builders actually declined. The decline was due to a lack of traffic and sales, indicating that first-time home buyers still are scarce. That is hard to reconcile with the surge in starts and permits.
Existing home sales declined 3.3% and were below expectations. This follows a nice increase the previous month. That leaves the 12-month sales increase at 6.1%. But the median price rose 4.1%, and the number of homes for sale increased, leaving a good inventory of homes for sale.
In manufacturing the Empire State Manufacturing Survey rose, following a decline last month and a flat period dating back to the third quarter of 2014. But the 3.09 reading was below expectations and is considered weak. Industrial Production declined for the fifth straight month, while the manufacturing component of the report was unchanged. The Kansas City Fed’s Manufacturing Index declined sharply from last month’s already-low number and was the lowest reading of the economic recovery. The PMI Manufacturing Index Flash still indicates growth with a reading of 53.8, but it is lower than last month and below expectations.
New unemployment claims were little changed the last two weeks.
In good news, the NFIB Small Business Optimism Index increased over last month and was well above expectations. It is a strong report, showing that economic growth is divided between the negative manufacturing sector and the positive remainder of the economy.
Retail sales were disappointing, coming in unchanged. While the report is volatile from month to month, for 2015 and for one-year sales growth is very modest.
The retail sales conflict with recent reports of high consumer optimism. Positive consumer sentiment usually is followed by strong retail sales. But the latest Consumer Sentiment survey from the University of Michigan declined sharply. Recent months had been at or near nine-year highs.
Leading Economic Indicators from the Conference Board increased sharply, due to the large surge in housing starts.
The Markets
Markets have been remarkably stable the last couple of weeks with the Dow not moving more than 100 points in a day. Also trading volume has been well below normal. Even so, the S&P 500 hit four all-time highs in six trading sessions.
Stock indexes were mixed this week. The Russell 2000 U.S. Smaller Companies Index led the way with a 0.6% gain. The S&P 500 gained about 0.2%, and the All-Country World Index gained 0.1%. The Dow Jones Industrial Average lost a fraction, and emerging market stocks lost almost 0.2%.
Bonds had a more volatile week. Treasury bonds have been sinking recently, apparently on expectations that the Fed would raise rates soon. Long-term treasuries were down 1.4% early in the week. But they recovered after the Fed minutes were released on Wednesday and continued to gain after Fed Chairman Janet Yellen said Friday that while the Fed is likely to raise rates in 2015, the increases will be gradual. Long-term treasuries gained 0.2% for the week, as did Treasury Inflation-Protected Securities (TIPS). High-yield bonds lost a fraction while investment-grade bonds lost 0.2%.
The dollar gained sharply after a couple of weeks of declines. The gains were spurred by the policy announcement from the ECB. The dollar was up almost 2.5% for the week.
Commodities didn’t have a good week. Broad-based commodities fared worst, losing more than 2.5%. Energy-based commodities and gold both lost about 1.5%.
Some Reading for You
Here’s the latest report on what helps people live longer and healthier.
Here are some details about the economic changes taking place in China.
This article explains how the more successful endowment funds invest their money.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
May 8, 2015 04:40 p.m.
Your Retirement Finance Week in Review
Next week I’ll be traveling, so there either won’t be a Bob’s Journal or it will be a brief one. If you attend the Las Vegas MoneyShow at Caesar’s policy (click here to register free) please stop by our booth in the Exhibit Hall.
Markets were volatile and mostly negative for the week. Corporate earnings season generally went well through April and early May. Instead, investors found other things to worry about.
China took front and center for much of the week. A few economic reports indicated that its economy is slower and faster than many analysts anticipated. The government is making a number of changes and making an economic transition that will be painful at times. A substantial amount of debt, especially by local governments and state-controlled enterprises. New policies are ending those practices. The result is drop declines in total borrowing and economic growth. These policies need to be supplemented with others that will help growth, and those are in the works. For now, there will be some volatility in China.
Other international news also affected investors. As usual, there were reports from Europe about the difficulties of making a deal with Greece. There also was an election in the U.K. that leading up to the vote seemed much more uncertain than the final vote.
Fed Chairman Janet Yellin roiled the markets for a while by answering a question about the stock market. She should know that a Fed chairman shouldn’t answer such questions. Instead, she was quoted as saying that stocks were overvalued and couldn’t rise forever. Some investors overreacted and sold stocks in response for a day or two.
Overall, it was a quiet week in the news and the markets. The economy seems to be recovering from the first quarter’s very slow growth without much sign of rising inflation.
The Data
There was a relatively small amount of data this week, but several reports worth noting. The Employment Situation reports, as usual, received the most attention, and I’ll get to them shortly, but first let’s look at Consumer Credit.
Household borrowing is a main driver of the economy. Too much borrowing led to the pre-crisis boom and subsequent collapse. Since then, consumers have been hesitant to borrow other than through vehicle and student loans. In the last monthly report, consumer credit increased and was the largest increase since July. Credit card debt increased meaningfully, which is unusual since the worst of the crisis. But in a longer-term perspective, consumer borrowing remains low. Especially low is mortgage borrowing. New mortgage borrowing is very much below historic levels. Households continue to deleverage and to be cautious about credit. Debt burdens as a percentage of disposable income and as a percentage of wealth are well below pre-crisis levels and show no sign of increasing. That puts a lid on economic growth and also on inflation.
This week’s labor market news was mixed. The ADP Employment Report came in below last month’s levels and expectations. New unemployment claims increased slightly after a large decline last week. But they remain near 15-year lows.
Friday’s Employment Situation reports were viewed positive though in their details they were mixed. The headline numbers were positive. The increase in nonfarm payrolls was substantially more than last month’s disappointing number and a little more than expectations. There also was another slight drop in the unemployment rate. But private payrolls fell short of expectations. Also, average hourly earnings barely increased, and hours worked held steady.
Broad measures of the economy were consistent with recent data. Manufacturing continues to have problems while the rest of the economy is growing but at a slower late than in late 2014. Factory Orders increased in line with expectations and ended seven months of declines. Aircraft, which tend to be volatile, were the major reason for the increase.
The PMI Services Index declined a bit but still indicates healthy growth. The ISM Non-Manufacturing Index actually and also indicates healthy growth. Despite strong indicators of growth in the index, there was no sign of inflation pressures.
The data indicate that the indicate is bouncing back from its winter slowdown, and the nonmanufacturing portion of the economy is doing well while the manufacturing sector continues to suffer from the strong dollar and decline in commodity prices, plus lower growth overseas.
In a cautionary note for corporate earnings, productivity declined for another quarter. Also, unit labor costs increased 5%. In the boom period fewer employees were able to produce more goods, because of higher productivity. That allowed producers to keep prices low and profits high. These trends have reversed, for at least a couple of quarters. Expectations are that now that the economy is recovery from its winter slow down, productivity should increase and unit labor costs decline or increase less for the rest of the year.
The Markets
The only stock major stock index with a positive return this week was the Dow Jones Industrial Average with a 0.5% return. The All-Country World Index broke even. The S&P 500 and Russell 2000 U.S. Smaller Companies Index tied with fractional losses. Emerging markets had the worst week, losing almost 1%.
Bonds didn’t fare much better. Long-term treasuries lost 1.5% and were down 3% at midweek. High-yield bonds gained a fraction, and investment-grade bonds broke even. Treasury Inflation-Protected Securities (TIPS) lost about 0.6%.
The dollar recovered from its midweek lows but still lost about 0.6% for the week.
Commodities were up early in the week but declined the rest of the week. Broad-based commodities finished with a gain of about 0.6%. Energy commodities gained about 0.25% after being up 3% early in the week. Gold hovered around “no change” all week and finished even for the week.
Some Reading for You
Here’s a somewhat academic paper that takes the same view on retirement spending patterns that I’ve discussed for years.
This post argues that seniors receive poor medical care and explains why.
This is an interesting story about some false marketing of diet supplements.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
May 1, 2015 04:40 p.m.
Your Retirement Finance Week in Review
I’ll be heading to Las Vegas soon for the MoneyShow at Caesar’s Palace from May 12-14. I’ll make two presentations, and we’ll have a booth where we can meet our readers. Registration is free. You can register by clicking here.
It’s been interesting to watch the Fed-watchers this year. As in 2014, we entered the year with most analysts believing that interest rates were headed higher and that the Fed would be acting early in the year. Instead, as the economic data rolled in and showed the economy to be weaker than many expected, the Fed didn’t act. In fact, the statements from the Fed and from many individual voting members indicated that the Fed is inclined to wait before acting. This week the Fed met and issued a fresh statement. In it, the Fed said the economy slowed since its last meeting. The statement did indicate that the majority of members believed the slowing was transitory. That caused many analysts to conclude that a rate hike in June was back under consideration and perhaps even likely.
The biggest risk to the economy is that the Fed might tighten too much, too soon. I think most Fed officials realize this and aren’t inclined to move too quickly. If they do raise interest rates soon, I think there would be a lag before they make another move. Inflation remains low. While the job market is improving, wage growth remains low. There have been recent signs that wage growth might improve, but there is no indication of that happening yet. I think wage growth will have to be sustained before the Fed becomes concerned.
Fed officials also are aware that each time they initiated quantitative easing it was less effective than the previous time. They know if they tighten prematurely and have to reverse course, they have limited tools to offset any decline in the economy.
While there will be a lot of volatility in the economy and markets this year, I don’t see a reason yet to reduce stock market positions. There’s no sign of a recession or of the Fed’s interest in slowing economic growth. Absent some crisis outside the economy and markets, both the economy and stocks ultimately should be positive for the year despite all the volatility.
The Data
There was generally positive news from the housing market this week. The S&P Case-Shiller Home Price Index led the way with a third consecutive month of strong price gains after lagging in late 2013. Prices rose 0.9% for the month and now show a 5% 12-month gain. Pending home sales also rose for the third consecutive month and exceeded expectations with a 1.1% gain. New home sales have been the weak link in the housing market lately, and we’ll have to wait to see if that is turning around.
Manufacturing still is slumping, primarily because of the weak dollar and declining commodity prices. Last month the Dallas Fed Manufacturing Survey registered its first decline in almost two years. It followed that with a steep decline in the latest release of 16.0. The Dallas Fed survey was the leader of the recovery since 2009, and it’s been leading the slump in manufacturing.
The Richmond Fed also was negative, though not as bad as last month. The anomaly in the report is that, though many segments of the report were weak, employment was strong. Likewise, the PMI Manufacturing Index, while still indicating expansion, declined from last month.
The ISM Manufacturing Index, which was more positive than all other manufacturing measures during 2014, stayed the same as last month. But the employment sector within the index contracted. This is markedly different from the other recent manufacturing reports. While issuing generally disappointing headline numbers, the other reports showed gains in employment.
A positive for manufacturing this week was the increase in the Chicago PMI. It increase from last month’s 46.3 to 52.3. A reading above 50 indicates expansion.
The rest of the economy continues to look good, The PMI Services Flash came in a little below last month’s report, but it still is strongly indicating expansion in the services sector.
Consumers continue to be generally optimistic. Consumer Confidence as compiled by The Conference Board took a sharp drop. But this was after a very big jump last month, which was very close to January’s seven and a half year high. This month’s number still is among the highest of the recovery. Consumer Sentiment as measured by the University of Michigan was unchanged and remains close to January’s eight year high.
There was some contradictory data on household income. Personal Income was flat for the last month but is still up 3.8% over 12 months. Yet, the Employment Cost Index rose. 0.7% and brought the 12-month increase to 2.6%. These still are low numbers compared to historic averages and especially for the period before the financial crisis. But they are higher than in recent periods and caused some analyst to worry about an increase in inflation.
Despite the flat Personal Income, consumer spending rose 0.4% and is up 3% over 12 months. The Personal Income and Outlays report still reports inflation to be under control. The PCE Price Index was up 0.3% for the month and 1.4% for 12 months.
New unemployment claims were down a hefty 34,000, bringing the four-week average to less than 284,000.
The first estimate of GDP for the first quarter was very low. The economy barely grew, registering a 0.2% annualized growth. The inflation measure in the report, the GDP Price Index, actually declined 0.1%. I don’t pay much attention to the GDP report because it is backward-looking and frequently-revised. Yet, it often moves markets and generates headlines. I think the latest report overstates how much the
