November 2015
November 25, 2015 12:00 p.m.
Your Retirement Finance Week in Review
I hope each of you has a great Thanksgiving holiday. The markets will have a short week, and all the data for the week has been issued. So, I’m sending this week’s review early.
The Data
A week’s worth of data was packed into three days this week. The data overall were mixed, indicating that the recent moderate growth rate will continue for a while.
The manufacturing data continued last week’s pattern of hinting that the sector might be forming a bottom. The PMI Manufacturing Index is the only data for that sector that hasn’t indicated contraction for some time. It’s monthly flash this week declined a bit from last month but still is over 50, indicating expansion. Even so, the number and many of its components are at two year lows.
The Richmond Fed Manufacturing Index declined after improving last month. Many of the components of the index were worse than the headline number. Durable Goods, on the other hand, had a significant increase that exceeded expectations. Even after excluding the volatile transportation sector, the increase was solid. New orders were an especially strong component of the report.
The housing data this week also were mixed. Existing home sales declined, though they were within expectations. Sale prices declined in addition to the quantity of homes sold declining. A small number of homes available for sale is considered a major cause of low sales. New home sales increased and were within expectations, though the increase doesn’t make up for last month’s big decline. The median sales price declined. Again, a low supply of homes for sale is considered a major cause of low sales figures.
The home price reports continue to be positive. The S&P Case-Shiller Home Price Index had a solid increase for the month, giving a 5.5% increase in home prices over 12 months. The FHFA House Price Index also had a solid increase resulting in a 6.1% 12 month gain. Overall, the housing market is growing and contributing to the overall economy but it is a long way from the pre-peak years.
Third-quarter GDP was revised upward from 1.5% to 2.1% annualized growth, another example of why I recommend not giving the report too much weight.
Corporate profits for the third quarter as calculated by the Bureau of Economic Analysis increased only 1.4%, following an 8.5% increase in the second quarter.
The consumer outlook declined in the last month. Consumer Confidence as measured by The Conference Board declined sharply to the lowest level since September 2014. The biggest drags on the measure were expectations, especially job expectations. Consumer Sentiment as measured by the University of Michigan also declined from the mid-month reading, but not nearly as much as The Conference Board measure. Also, the University of Michigan reading is higher than the end-of-October reading. The decline is only in the last two weeks. Both reports were compiled after the Paris attacks and likely reflect consumer reaction to those events.
The services sector continues to grow, according to the PMI Services Flash. It rose above expectations and to the highest level since April.
Personal Income had a nice monthly increase that was in line with expectations and well ahead of last month’s number. Wages and salaries showed a strong gain of 0.6% for the month. Consumer Spending, however, barely increased for the month.
The Fed’s preferred measure of inflation, the PCE Price Index barely increased and the core index didn’t increase at all. That makes the 12-month increase for the overall PCE 0.2% and for the core index 1.3%. That’s well below the Fed’s goal.
New unemployment gains declined sharply by 12,000. That keeps the measure near 42-year lows.
The Markets
It was a short, quiet week in most markets. U.S. markets will be closed on Thursday and open briefly on Friday.
The Russell 2000 U.S. Smaller Companies Index did best, gaining over 1.1%. Emerging market stocks did worst, losing about 0.3%. The rest of the major indexes clustered with returns around 0.2%.
Bonds didn’t do much, having only fractional gains and losses.
Gold gained about 0.4%. Energy-based commodities gained about 0.7% while broad-based commodities gained about 0.8%.
Some Reading for You
Here’s a good review of the Fed’s recent announcements.
This article explains why you might not want the best doctor in an emergency.
This is a very good explanation of why you should ignore all the forecasts.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
November 20, 2015 04:35 p.m.
Your Retirement Finance Week in Review
The Federal Reserve’s quantitative easing and zero interest rate strategies damaged economic growth instead of helping it. That’s the conclusion in a new book, Growing Global: Lessons for the New Enterprise by Michael Spence and Kevin Warsh. Spence won the Nobel for economics in 2004.
QE and ZIRP caused several actions that redirected financial activity away from the real economy to financial transactions. They say that QE has artificial effects on the economy, so businesses are uncertain how long the effects will last and what the effects will be after QE ends. QE also increases the liquidity of financial assets. That makes them more attractive to CEOs who just went through a financial crisis. They know that capital goods and business equipment can’t be sold to raise cash during a crisis, but financial assets can.
QE also reduces volatility in the financial markets, making them appear to be safer and better places to store cash and capital.
An interesting observation in the book is that the Fed knew QE would have little effect on actual economic activity. Instead, QE works as a signaling mechanism. It’s the Fed’s way of telling investors that there is a floor on asset prices, so it is safe to invest in them. The Fed’s hope was that rising financial asset prices would result in the wealth effect. People would feel wealthier because of rising asset prices, and that would trigger more spending and higher growth.
In fact, say Spence and Warsh, QE caused CEOs to invest less in their businesses. Investments in business equipment and assets other than housing grew at historically low rates from 2007 to 2014 and at far lower rates than in previous post-recession periods. Also, businesses are spending more of their cash on financial engineering activities (such as stock buybacks) instead of actual investing in their businesses. Again, earnings of the S&P 500 have grown at lower rates than previous post-recession periods.
Stock investors have been big supporters of QE. Stocks declined on any mention of a possibility that QE would end or that the Fed would raise rates. While QE apparently had a positive effect on stocks and other financial assets, the benefits are short term. Most of the increase in stock prices in recent years was due to increases in valuations rather than improvements in underlying businesses. That’s not good for either stock prices or the economy in the next few years.
The Data
Inflation still is low and is stable at this low level. There are a few pressures that could push prices higher: continuing growth in the U.S. economy and an improving job market that could generate pressure for higher wages. Those are balanced, however, by the strong deflationary trends. There is significant overcapacity around the globe and weak global economic growth. Also, the high levels of debt in the U.S. and much of the world restrain growth and price increases.
The Consumer Price Index increased modestly after declining the previous two months. That puts the 12-month increase at 0.2% for the overall index and at 1.9% after excluding food and energy. Keep in mind that the CPI overstates inflation because of the way it accounts for the cost of housing. While the Fed seems determined to raise interest rates, there’s nothing in the inflation picture to pressure them to do so.
Manufacturing still isn’t doing well, but it had some mixed signals this week. This is the second time in the last year that we see signs manufacturing might be finding a bottom. The Empire State Manufacturing Survey had its fourth consecutive month of solid declines, and the decline was about twice expectations. There wasn’t much good in the report, and it’s been among the weakest in manufacturing throughout 2015.
On the other hand, the Philadelphia Fed Business Outlook Survey was modestly positive, coming in much better than last month and above expectations. The details of the report were weak and at best indicate no change rather than improvement. Industrial Production was down a fraction, but the manufacturing component increased 0.4%. This was above expectations and ends two months of declines. Construction supplies led the increase.
The Kansas City Fed Manufacturing Index was slightly positive this month, for the first time since February. Also, some segments of the index were even more positive.
Housing had two weaker-than-expected reports this week. The Housing Market Index from NAHB declined and came in below expectations. The good news is that the levels of the index and its components are considered strong and positive.
Housing starts had a sharp decline, but most of the decline was due to a significant drop in multi-family housing. Single-family home starts didn’t decline as much. Also, building permits increased, indicating higher starts in the future.
New unemployment claims declined 5,000. That keeps the level of new claims and the four-week average at historically very low levels.
Leading Economic Indicators increased sharply. This was due to rising interest rates, stock prices, and building permits. This increase comes after a flat period since July.
The Markets
It was a good week for most assets.
Emerging markets led the way with a 4.25% increase. The major market indexes (S&P 500, Dow Jones Industrial Average, and All-Country World Index) each gained around 3.0%. The Russell 2000 U.S. Smaller Companies Index lagged with about a 2.5% gain.
Bonds also generally were positive. Long-term treasuries and Treasury Inflation-Protected Securities (TIPS) each gained about 0.6%. Treasuries were up about 1% early on Friday before losing some ground. Investment-trade bonds gained about 0.3%. High-yield bonds lost a fraction.
The dollar gained almost 0.4%.
Commodities didn’t do as well as other assets. Energy-based commodities lost almost 0.2%. Gold lost about 0.8%. Broad-based commodities lost about 1%.
Some Reading for You
This article is a companion to the Spence and Warsh book discussed above. It says companies are spending too much money on financial engineering.
Here are a couple of good articles explaining the Islamic State and why authorities underestimated them.
Former Speaker of the House John Boehner is having trouble adjusting to retirement, according to this article.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
November 13, 2015 04:35 p.m.
Your Retirement Finance Week in Review
Stocks had a poor week, their first weekly loss in nearly two months. The rally since the September lows ran out of steam.
One factor weighing on investors’ minds was the concerted effort by Fed officials to telegraph an interest rate increase at its December meeting. The increase is likely to be very modest, and it isn’t going to be followed by a string of sharp increases. The economy isn’t likely to be able to withstand significant rate increases. When the rest of the world’s central banks are looking for ways to make policy easier, higher interest rates in the U.S. will make the dollar even stronger.
More than likely the worst effects of the rate increase will occur before the Fed takes action. It’s also likely that the early reaction will be an overreaction. Market interest rates will increase too much before the Fed meeting and decline soon after it raises rates, if not before.
Another factor weighing on the market is corporate earnings. Earnings growth and profit margins have slipped at many companies, especially global companies that are hurt by the combination of a strong dollar and weak economies outside the U.S. This week was particularly bad, because a number of retailers reported earnings. They weren’t good for the most part. That lowered the prices of those retailers’ stocks.
The real question for investors is whether the weak earnings and sales of the retailers was due to a slowing economy or to a change in retail. Many reports are indicating that Amazon.com’s sales are increasing at the expense of other retailers, including Wal-Mart. If there’s a shift in the way people are buying rather than a reduction in spending, there should be a shift in the relative performances of different stocks but not an overall decline in stocks.
As we’ll see below, it looks like the consumer overall is healthy and so are retail sales. For now, the U.S. economy continues to grow, though there are pockets of weakness in commodity-based businesses, manufacturing, and some retailers.
The Data
Two reports indicate that the domestic economy should continue to do well through the holidays. Consumer Sentiment as measured by the University of Michigan rose sharply in the mid-month flash reading. It’s the highest reading since July and was positive across the board. Backing that up was a solid increase in retail sales. The headline number was weak, but that’s because of declining gasoline prices and slower auto sales. After excluding those segments, overall sales had a healthy increase.
There’s still deflation at the wholesale level. Producer prices declined over the month and over 12 months. There’s a very slight increase in producer prices over the last 12 months when food and energy are excluded.
The labor market also appears to remain solid. New unemployment claims didn’t change at all. The JOLTS (Job Openings and Labor Turnover Survey) reported a solid increase in the number of job openings, though it still isn’t back to the high of last July. Despite the strong job growth, wage increases still are likely to be limited because employees are hesitant to leave jobs they have. The quits rate in the survey was unchanged for the sixth month.
Small business continues to be fairly positive about the future, according to the Small Business Optimism Index from the NFIB. The index was unchanged from last month. Analysts were expecting a small increase. Most businesses plan to hire more workers and to make capital investments, though they also said earnings are a problem and they generally view the economy is soft. Many report difficulty finding qualified workers.
The Markets
This week stocks brought back memories of the August-September correction. The Russell 2000 U.S. Smaller Companies Index anchored the bottom by losing almost 4% for the week. Emerging market stocks lost 3.5%. The Dow Jones Industrial Average and the S&P 500 each lost about 3%. The All-Country World Index fared a little better, losing about 2.6%.
Bonds had a better week, but not uniformly good. Long-term treasuries rebounded with a gain of about 1.3%. Investment-grade bonds gained about 0.6% while TIPS (Treasury Inflation-Protected Securities) gained about 0.1%. High-yield bonds as usual followed stocks more than they did bonds and lost 1.4%.
The dollar lost about 0.3%.
None of the commodity indexes had a good week. Energy-based commodities lost over 5%. Broader-based commodities lost about 3.4%. Gold lost about 0.5%.
Some Reading for You
Daniel Kahneman gave a good interview reiterating his thoughts on how to make better decisions.
Apparently there’s a lot of money leaving China and primarily going into real estate, according to this report.
Corporations just don’t want to spend reinvest their cash in their businesses, which isn’t a good sign for economic growth.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
November 6, 2015 04:55 p.m.
Your Retirement Finance Week in Review
The Federal Reserve and its future policies dominated the financial headlines for the week. Several Fed members, including Chairman Janet Yellin, wanted to make clear that they mostly likely were going to raise rates at the December meeting. That didn’t seem to persuade many investors, since a majority of Fed voting members have been something like that for more than a year. Many people expected rates to be increased early in 2015.
Friday’s employment reports seem to have convinced most economists and analysts that the Fed really will raise rates in December. Of course, most of them believed the same thing for most of 2015 before they finally changed their minds in July and August.
What matters isn’t whether or not the Fed raises rates at its December meeting. The more important question is how much the Fed will raise rates in December and the following meeting. I’ve said for some time that the main risk to the economy is the Fed’s raising rates too far, too fast. While the non-manufacturing U.S. economy has sustainable moderate growth, the economy isn’t particularly strong. Fiscal policy already is tight and has been for a while. It’s also likely to become tighter, with more regulation and lower spending. There are significant headwinds from the global economy, and the manufacturing sector remains in a recession if not worse.
What’s especially important is that the Fed has few tools left if economic growth does slide. Quantitative easing became less effective with each iteration, and another phase isn’t likely to do much. Interest rates can’t be brought down to zero again, because they’re already there. There are some esoteric policies the Fed is studying and could use, but they aren’t likely to be as effective as traditional policies. That’s why the Fed has been slow to raise rates and I think won’t raise them sharply any time soon.
The Data
This week’s data show that the manufacturing economy still is in the doldrums while the rest of the economy appears to have increased its growth rate.
We start with the overhyped Employment Situation reports. The number of jobs increased far more than expectations and than the weaker numbers of the last few months. In fact, it was the highest monthly increase since last December. Also, the unemployment rate dropped to 5.0%, the lowest level since August 2008. The average workweek was unchanged. But perhaps most important is that average hourly earnings increased a healthy 0.4%. Even the manufacturing segment of the employment reports was positive. There wasn’t anything to complain about in the reports.
It’s interesting that the other two employment reports for the week weren’t as strong. The ADP Employment Report had a nice gain that was in line with expectations, but it wasn’t as strong as the government reports. Also, new unemployment claims actually increased by 16,000 after many weeks of modest gains or declines. The four-week moving average still is very low.
Consumer credit surged for the largest monthly gain in the history of the series back to 1941. Most of the increase was in the usual auto and student loans, but credit card debt also increased again. That could indicate strong buying in the holiday season. It is an indication that the high levels of consumer confidence we’ve seen in recent months are causing consumers to buy more.
The PMI Manufacturing Index is the only manufacturing measure that’s been positive in recent months, and that continued. The measure improved and continues to indicate an expansion in manufacturing. The ISM Manufacturing Index on the other hand declined a fraction and is jus barely indicating expansion instead of contraction in the sector.
Factory Orders also declined 1%, and last month’s negative number was revised further downward. It was the 11th decline in 14 months.
Productivity increased but at a lower rate than last quarter. Productivity growth decreased to a 1.6% rate, and that was due largely to lower output. The lower productivity and output also increased unit labor costs by 1.4%.
Several measures reported positive trends in the bulk of the economy that isn’t manufacturing. The PMI Services Index declined but still is in the territory indicating moderate growth. The ISM Non-Manufacturing Index, however, increased sharply and much more than expectations. Even the export segment of the report increased.
The Markets
Stocks increased for the most part, though there wasn’t much activity for the week. The Russell 2000 U.S. Smaller Companies Index did the best, rising over 2.5%. The Dow Jones Industrial Average was next with an increase just over 1%. The S&P 500 rose 0.5%. Emerging market equities had a healthy gain for the week before dropping on Friday. They barely gained for the week. The All-Country World Index had a slight loss.
Bonds didn’t fare as well and suffered sharp declined Friday morning after Employment Situation reports came out. Long-term treasuries lost almost 2.5% for the week. The rest of the major bond indexes all clustered with losses just under 1% (investment-grade bonds, high-yield bonds, and Treasury Inflation-Protected Securities (TIPS).
The dollar had a strong week, gaining 2.5%.
Commodities also had a bad week, especially after the jobs reports were issued. Gold fared the worst, losing 4%. Both energy-based commodities and broadly-based commodities lost about 2.25%.
Some Reading for You
Here’s how one of the country’s largest charities learned to use economic theory to become more efficient and better use its resources.
This article presents the theory that weakness in the housing market is causing low real interest rates and generally hurting the economy.
This article uses IRS data to show what the super rich do with their money.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
