November 2013

Last update on: Jun 15 2020

November 29, 2013 04:25 p.m.
Your Retirement Finance Week in Review

I hope each of you is having an enjoyable and relaxing Thanksgiving weekend. I am, and I am thankful for the many positive comments I continue to receive from Retirement Watch readers.

Too many investors lack a strategy for managing their investments. That makes them subject to the latest financial news and the whims of the markets. You can learn how to put some strategy and structure in your portfolio at our next webinar. I’m looking forward to it and hope you are, too. There still are some spaces available, so act now if you’re interested. It will be on Dec. 10 at 3:30 p.m. eastern time. I’ll be presenting with TJT Capital. The title is “Challenges Investors Face: How TJT Capital Manages Portfolios to Participate in Bull Markets and Protect Capital in Bear Markets.” You can reserve your space today by clicking here. I discuss these webinars in my capacity as Managing Member of Carlson Wealth Advisors, L.L.C.

You also have the opportunity to see me and others discuss ways you can avoid the recent tax increases. I’ll be part of the Oxford Club’s “Wealth Survival Summit: Tax-Slashing Secrets to Outsmart Big Government.” This is a free online presentation in which I’ll be joined by other tax and financial experts, such as Cato Institute Senior Fellow Dan Mitchell, former top IRS agent Jack Cohen, Professor of Finance Scott Brown, Oxford Club Investment Director Alexander Green and more. Click here for more details about this free webinar.

The stock indexes continue to forge ahead. They do so despite many headlines about bubbles and many investors pointing to problems such as lower earnings growth, higher interest rates, geopolitical problems, and more. Consumer and business sentiment also are falling, but stocks continue to move ahead.

What’s behind the stock surge. The first factor is that there aren’t many other investment options. Cash is safe in the short term but is very costly over longer periods because today’s low interest rates lose ground to inflation and taxes. Despite a lot of talk about tapering and such, it appears that the Fed under its likely next chairman, Janet Yellin, isn’t going to change policy much. The Fed’s economic forecasts often are wrong. So, a forecast that the economy will be strong enough for the Fed to reduce its role in 2014 probably means growth will be too slow for the Fed to relax.

Also, momentum in investments is a powerful force. Stock indexes keep moving higher because they’ve been moving higher. Usually some event has to intervene to reverse a rally such as this, and none of the events to date has been strong enough to reverse the trend.

My advice, as always, is not to try to guess what will happen next in the markets or decide which of the gurus is right. Instead, focus on risk management. Given today’s values, momentum, consumer sentiment, and other factors, a portion of most portfolios should be in a mix of U.S. and European stocks. But you shouldn’t have an entire portfolio in stocks, and you probably should be invested at less than your maximum stock allocation. You also should have a plan for reducing or eliminating your stock positions in case something happens that makes all those doomsayers right, for at least a while.

The Data

There wasn’t a lot of data released this week, primarily because of the holiday-shortened week, but some of the data released is important.

Most of this week’s data focused on housing. It showed the same picture we’ve seen in recent months. In general, residential housing is moving forward but at a slower pace than earlier this year. Some conclude this means housing is slowing heading toward another cliff and will tumble when the Fed raises interest rates or some other event triggers and buyers’ strike, while others conclude that the previous pace couldn’t be sustained and we’re moving toward a steady, sustainable pace of growth. I suspect that the last year pulled some growth from the next year or two. Rising mortgage rates plus rising home prices makes homes less affordable. Also, the housing price collapse after 2005 makes people less inclined to rush to buy homes. I’m expecting fairly slow but steady home sales and price increases.

Pending home sales, reported by the National Association of Realtors, declined for the fifth month in a row. This number generally is for contracts signed, so it should be reflected in home sales in 90 days or less. Housing starts for two months were reported as we dig out of the backlog from the partial government shutdown. The showed an increase in permits issued, but the bulk of the new permits were for apartments. Permits to start new single family homes were down to flat for the two months.

Two housing price reports were issued. The FHFA House Price Index rose 0.3% for September and was slightly below expectations and August’s level. The 12 month rate of price increases was 8.5%. The S&P Case-Shiller Home Price Index also was released and showed a more robust increase of 1% for the month and 13.3% for 12 months. But that reflects differences in the methodology of the indexes. Case-Shiller uses a three-month average, while FHFA uses only the latest month. Also, FHFA uses only homes financed or bundled by government agencies. Also, Case-Shiller includes distressed sales, which some analysts believe can exaggerate price increases.

There were several manufacturing reports. Both the Dallas and Richmond Fed showed growth in their regions. The Richmond Fed reported a sharp increase after a couple months of negligible gains. The Fed regional bank reports for the month paint a mixed picture. There was slowing growth in Philadelphia and New York, while steady or growing growth in other regions.

The Chicago Purchasing Managers Index came in at less than last month but much stronger than expectations, making it a positive report reflecting strong conditions in the Chicago area. Durable Goods orders declined 2% for October. This followed a tepid report for September. Analysts generally attributed the decline to caution in the midst of the partial government shutdown. Even after excluding the volatile transportation component, Durable Goods orders were slightly down for October.

In general economic data, new unemployment claims declined again. Labor market data continues to indicate that businesses generally aren’t firing people but they also aren’t hiring many. Consumer sentiment as measured by the University of Michigan surprised most people by rising sharply for November. This contrasted with Consumer Confidence as measured by The Conference Board fell sharply for the second month in a row. The report attributes this largely to the partial government shutdown. Details of the report indicate little change in the assessments of consumers’ current situation but weakness in expectations for the future.

The Leading Economic Indicators rose just above expectations but fell from last month’s number. This was considered mostly a glitch. New unemployment claims are a main factor and rose sharply in the last month because of both the partial government shutdown and data problems in California.

The Markets

It was a mixed week for stock market indexes. U.S. stocks had their eightaight positive week, though they tumbled near the end of Friday’s holiday-shortened session. The Russell 2000 U.S. Smaller Companies Index led the pack with about a 2% gain. Emerging market stocks were next with a 1.5% gain. The broader indexes of large, developed country companies lagged but had positive returns. Returns were clustered around 0.6% for the week for the S&P 500, Dow 30, and All-Country World Index.

Bonds generally had a volatile week and were a mixed bag. Long-term treasuries surged on Friday to close with about a 0.9% gain for the week, but they were up about 1.2% on Wednesday. Investment-grade bonds gained about 0.6% and high-yield bonds gained 0.4%. Treasury Inflation-Protected Securities (TIPS) tumbled late in the week for a loss of almost 0.2%.

The dollar was negative most of the week, losing about 0.1% at the close. Commodities surged on Friday to turn a generally negative week positive. Broad-based commodities led the way with about a 0.8% gain. Energy-based commodities and gold both returned about 0.4%.

Some Reading for You

If you want some reasons not to be worried about all the stock bubble talk, read this.

I like John Makin’s warning that deflation is more of a concern for central banks now than inflation.

Many people are wrong about commodities markets. This post summarizes a paper explaining why so many people were wrong about the last commodity surge.

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

November 26, 2013 04:25 p.m.
Your Retirement Finance Week in Review

Our next webinar is attracting a lot of attention, but we have some additional spaces left. I’m looking forward to it and hope you are, too. So act now if you’re interested. It will be on Dec. 10 at 3:30 p.m. eastern time. I’ll be presenting with TJT Capital. The title for this one is “Challenges Investors Face: How TJT Capital Manages Portfolios to Participate in Bull Markets and Protect Capital in Bear Markets.” Attendance is limited. You can reserve your space today by clicking here. I discuss these webinars in my capacity as Managing Member of Carlson Wealth Advisors, L.L.C.

We continue to see a number of conflicting forces in the economy and markets.

On the positive side we have rising stock indexes with rising investor optimism and an economy that continues to grow. On the negative side, most facets of the economy clearly slowed from their highs of early 2013. Business spending and investment hasn’t changed much, but that usually lags changes in household and consumer demand. If household demand doesn’t pick up soon, businesses might reduce their spending and investment, slowing the economy further. But if households adjust to higher interest rates as well as they adjusted to higher taxes earlier in the year, household demand will pick up again soon.

The greatest conflicts probably are among stock market observers. The optimists see strong positive momentum, steady flows of new money into stocks, and reasonable valuations. Pessimists talk about a bubble and make comparisons to 2007. They see high valuations and point to especially high valuations in certain stocks, especially in the technology sector (Twitter being foremost among them). They also point to slowing earnings growth and the slowing economy.

I encourage you not to take sides or try to anticipate the next turn of the markets of the economy. Instead, have some of your portfolio positioned to profit from the current trends but don’t take an all-or-nothing strategy. Because there’s so much uncertainty, you should have some diversification as well as a strategy for deciding when the trends have changed and how you’ll react. You can sit around trying to be right, or you can make money no matter who is right.

I expect current trends to continue through the end of the year. After that, I think we’ll have a less conflicted picture one way or the other.

The Data

There wasn’t a lot of data this week, but a few things did move markets.

The biggest event of the week probably was the release of the minutes of the latest meeting of the Federal Reserve Open Market Committee. There were extended discussions of various aspects of changing the quantitative easing policy. The committee concluded, as it has in the past, that changes would depend on the economic data and the data so far did not call for a policy change. Yet, a number of investors apparently interpreted that as a signal of imminent policy tightening and stocks initially declined.

Related to that, the nomination of Janet Yellin to replace Ben Bernanke clear the Senate Finance committee. That gave the markets a boost, since Yellin is considered a supporter of continuing current policy for a while.

Another factor in favor of continuing current policy is inflation. The Consumer Price Index has been below the Fed’s 2% target for a while and went even further below the target with the latest release. The headline number actually declined, showing deflation, and excluding food and energy the CPI rose only 0.1% for the month. The 12-month change in the main CPI is less than 1%, and excluding food and energy is 1.7%.

Producer Price Index inflation also was reported this week and showed deflation at 0.2% for the month. Excluding food and energy it was up 0.2%. For the last 12 months, the numbers are 0.3% and 1.4% respectively.

The other market-moving report of the week was retail sales. The headline number was very strong after several months of weak numbers. But the details weren’t as positive. Most of the growth was in auto sales, which were very slack the previous month. Beyond that, the core retail sales were tepid. When combined with the last few months of weak retail sales growth, it indicates that households still are cautious about spending. They haven’t returned to the higher-spending pattern of early in the year. They’re more interested in saving than spending.

One reason might be revealed in the latest employment cost index. This showed very modest wage growth and was a little below expectations. The 12-month rate is the lowest since the fourth quarter of 2011.

There were two housing reports. The Housing Market Index from the home builders’ association. It was unchanged from last month’s report, which was revised slightly down. That’s a little below the August high but still indicates a fair amount of optimism on the part of home builders. Existing home sales declined again and were slightly below expectations. Single-family home sales are down for at least two consecutive months and are leading the disappointment in this number. It is a clear indication that the higher mortgage rates, and perhaps other factors, are cooling the housing market.

There were a few manufacturing reports, and they were more positive than reports on household activity. Both the Philadelphia Fed and Kansas City Fed surveys showed modest growth in manufacturing activity in their regions. The PMI Manufacturing mid-month flash index actually showed a sizeable gain and the highest level in eight months.

New unemployment claims had a sharp drop, but that might have been due to the Veterans’ Day holiday. The JOLTS (Job Openings and Labor Turnover Survey) showed not much change in the labor market. Both job openings and hires were about unchanged from the last report. The key metric probably is that there aren’t too many people voluntarily leaving their jobs. That shows a lack of confidence in their ability to find new positions.

The Markets

It was another good week for U.S. stocks, but not so much for international equities. Emerging market stocks, after a strong week last week, tumbled over 1.5% and were down over 2.5% at midweek. The All-Country World Index did fare as poorly but was down a fraction for the week.

The Russell 2000 U.S. Smaller Companies Index led for the week with a gain of almost 1%. The S&P 500 and Dow 30 each closed with a 0.5% gain for the week and were in negative territory at midweek. The Russell 2000 was down more than 1% at midweek and had a strong close to end as the week’s leader.

Bonds struggled for the week, especially after the Fed minutes were interpreted as an indication of imminent tightening by the Fed. Long-term treasury bonds were down about 2.5% at midweek. They recovered some to close the week down about 0.6%. Treasury Inflatin-Protected Securities (TIPS) were next worse with a loss of about 0.4%. Close behind were international inflation-indexed bonds with a loss of 0.2%. Investment-grade bonds and high-yield bonds both closed about even for the week.

The dollar closed with a gain of about 0.2% but was up 0.6% at midweek. Commodities had a mixed week. Gold tanked after the Fed minutes were released and lost over 3% for the week. Broader-based commodities gained about 0.6% while energy-related commodities gained over 1%.

Some Reading for You

Alan Greenspan has a mea culpa of sorts in Foreign Affairs.

A very entertaining and insightful pair of shareholder letters were issued by GMO this week.

One of the problems with quantitative easing is that it is pumping up the prices of trash.

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

November 15, 2013 04:15 p.m.
Your Retirement Finance Week in Review

Many of you already reserved your spaces for our next webinar. Thank you, and I look forward to it. There still are spaces available, so act now if you’re interested. It will be on Dec. 10 at 3:30 p.m. eastern time. I’ll be presenting with TJT Capital. The title for this one is “Challenges Investors Face: How TJT Capital Manages Portfolios to Participate in Bull Markets and Protect Capital in Bear Markets.” Attendance is limited. You can reserve your space today by clicking here. I discuss these webinars in my capacity as Managing Member of Carlson Wealth Advisors, L.L.C.

We might be nearing a turning point in the economy and stock markets, so we have to watch data closely. As you know, the market raised interested rates starting in May. Rates declined a bit from their highs but still are higher than they were before the increase. The rate increase slowed consumer demand and the housing market.

So far, businesses haven’t reacted much. Businesses tend to react to changes in household demand, but with a lag. The recent employment reports showed decent job growth. But retail sales over the last few months remain sluggish, and consumer confidence surveys remain down. In the last couple of weeks we’ve seen signs that businesses might be planning for lower household demand going forward.

That’s what we need to watch for. If retail sales and other signs of household demand increase, businesses probably will relax. But continued weakness in demand likely will be acted on by businesses. One factor that bears watching is household income. While recent employment reports showed healthy jobs growth, they also showed little growth in wages per hour or hours worked. Add that to higher interest rates and a slowdown in housing and you have an increased probability demand will slow.

I’ve believed that the economy and consumers would adapt to higher interest rates the way they did to higher taxes earlier in the year. But it’s not a given that will happen. I’m still planning for an increase in growth late in 2013 and in early 2014, but I’m also alert for signs that it might not happen.

The Data

This was a light data week, especially since the government took Monday off to commemorate Veterans’ Day.

The NFIB Small Business Optimism Index declined again. Pessimism definitely increased, and small business owners blamed it partly on events in Washington. The small business measure is important to watch, because small businesses tend to be closer to changes in domestic household demand. They don’t have international operations and feel changes in demand and sentiment quickly. Two months of declines in the index raise caution flags.

New unemployment claims declined a little bit. It’s another sign that the labor market isn’t in crisis but we’re still a long way from a normal level of unemployment and decent wage growth.

Productivity in the third quarter rose a decent 1.9% but that was a little below expectations. But unit labor costs declined 0.6%, which was even more than expectations. While that is good for business profit margins, it doesn’t help household demand and is another indication that deflation is at least as much of a potential problem as inflation.

The only two manufacturing reports for the week were mixed. The Empire State Manufacturing Survey registered a small decline, but the decline was across the board. New orders were down significantly, which often is a precursor to more negative readings down the road. The headline number for Industrial Production was slightly negative. But when the manufacturing component is isolated it showed a modest increase in line with expectations.

The Markets

This was a good week for stocks, especially emerging market stocks. Emerging market equities peaked in April 2011 and slid while the U.S. indexes continued to rise. But they’ve had a good run since late August and had a very good week this week, up 3%. They surged on news that several large hedge funds decided they declined enough and released SEC filings of large recent purchases.

The Dow 30 was the laggard of major indexes, gaining 1%. The S&P 500 and All-Country World Index each gained about 1.5%. In general a good week for stock investors, through most of the gains came on Thursday and Friday.

Bonds also had a good week. Long-term treasuries rose 1%, and investment-grade bonds rose 0.7%. Treasury Inflation-Protected Securities (TIPS) also rose about 0.7% while high yield bonds rose only 0.3%.

The dollar slid after Fed Chairman nominee Janet Yellin indicated quantitative easing was likely to continue. It lost 0.4% for the week.

Commodity investors also generally prospered. The exception was broad-based commodities with a loss of 0.2%. But gold gained about 0.5% after being down 1.2% early in the week. Energy-based commodities rose 0.8%.

Some Reading for You

Here’s an article about a neurologist who believed that grains and other carbohydrates contribute to dementia and Alzheimer’s.

Here’s a good take on last week’s employment reports.

And here’s an argument for why economic growth will remain slow.

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

November 8, 2013 04:45 p.m.
Your Retirement Finance Week in Review

Please reserve Dec. 10 at 3:30 p.m. eastern time on your calendar. I’ll be presenting another webinar with TJT Capital. These webinars have been increasingly popular over the last few years. The title for this one is “Challenges Investors Face: How TJT Capital Manages Portfolios to Participate in Bull Markets and Protect Capital in Bear Markets.” Attendance is limited. You can reserve your space today by clicking here.

The confusing way investors typically interpret and react to short-term news was evident this week. The GDP report, delayed because of the partial government shutdown, was issued on Thursday. After Thursday’s market close, The Wall Street Journal stacked two contradictory headlines on its web site:

U.S. GDP Growth Masks Weakness

Stocks Drop Amid Fed Worries

The first article explained, as I’ll elaborate below, that the GDP report, while sporting a better-than-expected headline number, actually wasn’t very positive. The second article said that the better-than-expected GDP report raised investor concerns that the Fed would reduce its monetary stimulus sooner than expected. The themes of the articles couldn’t be more different. Yet, they were responses to the same data.

That is among the reasons why I don’t recommend investing according to the latest data. I’m usually amused when someone asks me what I expect to see in the latest big data release and expect the markets to react. The answers are versions of “I don’t know” and “I don’t care”. Whatever market reaction there is will be short-term, unless the data is preceded and followed by other data that reveals similar things about the economy.

It’s better to invest according to trends rather than single data points. Markets will bounce up and down in response to particular news events, but those short-term moves don’t matter. All you should be interested in are trends and any indications that an established trend is changing. Don’t try to capture a top or a bottom, but try to grab the large middle sections of the trends.

Before the U.S. reports on Thursday and Friday, the week’s big news was the European Central Bank unexpectedly reduced interest rates. The situation in Europe still is perilous, though it’s been stable for a while. The ECB must be more active to avoid another downturn, and it needs to be much more active for growth to resume at a normal rate.

The Data

This week we had the usual first-week-of-the-month data reports, which means several widely-followed reports were packed into Thursday and Friday. The headline numbers of the reports were better-than-expected, but those reports are backward-looking and usually revised.

We start with Friday’s employment situation reports. The attention-getting number of new jobs created was 204,000, well above recent months and expectations. Contrary to most forecasts, the Department of Labor said the partial government shutdown had no effect on the report.

But the report wasn’t all positive. The unemployment rate inched higher. More importantly, average hourly earnings only inched up 0.1%, the same rate as in recent months, and the length of the average workweek didn’t budge. We really need to see household incomes increase for economic growth to return to a decent rate, and there aren’t signs that wages paid or hours worked will trigger that growth yet.

The GDP for the third quarter was surprisingly high at 2.8%, which is higher than the second quarter and much higher than expectations. Other data indicated economic growth slowed in the third quarter, so the number was a surprise. But in the arithmetic of the GDP computation, the excess growth largely was due to an increase in business inventories. Usually that is reversed in the following quarter, so it isn’t a reflection of real economic growth. Another negative in the report is that inflation as measured by the GDP price index rose 1.9%, compared to 0.6% last quarter. That’s not a worrying level of inflation, and is not reflected in other inflation reports. But it is a sharp increase for one quarter. If repeated a few more times, the Fed will have to take action.

Taken together, these two reports largely are consistent with other data. The economy slowed in the third quarter, but didn’t venture near recession territory. The labor market still is improving slowly, and that means there’s a lid on the economic growth rate. I expect growth to increase over the next few quarters as the economy adjusts to the fiscal tightening and higher interest rates that occurred earlier in the year.

The Labor Department said there finally were no special factors to distort the new unemployment claims report. The number came in at 336,000, which is well above the 300,000 level established in the summer before the distortions and before the economy slowed.

The Personal Income and Outlays report had some surprises. A non-surprise was that consumer spending grew modestly. We knew that from other reports and expected it in light of the fiscal tightening and higher interest rates. One surprise was a nice i

November 2013

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