October 2011
October 31, 2011 12:15 p.m.
Your Retirement Finance Week in Review
Last week was a wild, euphoric one in the markets, and it capped off a great month for equity investors. Stocks had their best month since 1974. The major indexes rose over 12%. A collection of good news hit the market recently. Of course, there’s a natural rally from the steep declines in August and September. Also, the U.S. economic data for the last month mostly was full of positive surprises, which was a big change for the steady stream of negative surprises the previous two months.
Of course, the big news throughout the week came from Europe, and the really big news was announced early Thursday morning. European policy makers regularly hinted they were near a deal on the sovereign debt crisis, and Thursday they announced a deal. Stock investors were cheered by the news and pushed up market indexes globally.
Let’s take a brief, closer look at that deal. The banks and other lenders voluntarily agree to reduce Greece’s debt by 50%, up from the 20% previously agreed. That’s more manageable for Greece, but it still owes 120% of GDP. There’s a plan to recapitalize the major banks in Europe, but it’s not clear where the money will come from. The hope appears to be that private investors will want to buy stock in the banks. A large portion of the additional bailout money comes from leveraging the existing stabilization fund. Again, it’s not clear where that leverage will come from.
It appears to me that there are holes in the deal. It satisfies the markets for now, but it likely makes the problem worse in the long term. Greece still will have to continue austerity measures. Those are very unpopular with the citizens, and they also reduce economic growth. That makes it harder to pay off the remaining debt. The deal also doesn’t do much for Italy and Spain. Even with leverage, the amount of money involved isn’t sufficient to ultimately cover the 50% losses in Greece debt. It appears that there’s a plan to guarantee debt other than Greece’s, but who will guarantee that and how they will pay for it isn’t clear. The deal might have bought about 12 months, but after that a lot of debt will be due or have to be rolled over. The deal doesn’t have enough money to handle that and future debt deadlines.
While stock markets liked the deal, other markets weren’t as euphoric. Market yields on Greece debt barely budgeted. They still anticipate default within a year. Gold should have declined if the deal were a good one, but it didn’t. Yields on other sovereign debt also didn’t decline much.
In short, the stock market euphoria on the deal isn’t warranted long term, but it was a good opportunity for traders. Investors who were short equities also had to cover those shorts to avoid the relief rally.
Now, we look at recent economic data and market action.
The Data
Last week’s big economic report was the GDP number. It showed growth of 2.5% annualized. It came out the same day as the European deal was announced, and investors liked the number. It was equal to expectations.
The report is not as encouraging as headlines indicated. GDP has five components: personal spending; residential fixed investment; nonresidential fixed investment; change in business inventories; net exports; and government purchases. Business inventories declined and reduced growth for the quarter. Government purchases, exports, and residential fixed investment were relatively flat.
The contributors to growth were personal spending and nonresidential fixed investment. Personal spending growth was strong, but for the quarter it’s been rising faster than incomes. Households have been dipping into savings to spend. It’s doubtful they’ll be able or willing to do that indefinitely. Business investment grew strongly and has been a linchpin of economic growth since the recession’s bottom in March 2009. But indicators are that this is slowing and businesses plan to reduce their investments in the next few quarters.
In short, it looks like that GDP growth will decline in the next few quarters. Even if growth stays at the third quarter’s level, that is not a good sign. There’s a lot of unused capacity in the economy, including high unemployment. A 2.5% GDP growth rate isn’t high enough to put a dent in the unused capacity and unemployment.
The durable goods report, after excluding transportation, was strong. The strength in the report is puzzling, because it is counter to various surveys of business sentiment and intentions. The new orders section of the report is consistent with a coming decline in durable goods production.
Likewise, consumer confidence as reported on Tuesday was very low and below expectations. This differs from the University of Michigan Consumer Sentiment survey reported on Friday. But despite the improvement in consumer sentiment, the actual level is at recessionary levels. I’ve seen analysts say the consumer surveys don’t matter to them, because they don’t correlate with economic growth. But the data I’ve looked at indicates that the surveys are good leading indicators of household spending and GDP growth.
Housing data for the week generally was dismal. New unemployment claims were in the same range they’ve been in for months.
All the data continue to point to very modest growth at best and the risk of a decline. There’s little reason to expect improvements in either residential housing or employment in coming months.
The Markets
For the month of October, emerging market stocks are up about 25%, while the S&P 500 is up around 15%. Long-term treasury bonds lost about 10%. Gold is up about 5%, and preferred stock are up about 8%. Despite the recent decline in treasury bonds, Vanguard Long-Term U.S. Treasury still hasn’t triggered out sell signal. We’re making money in our new position in Tocqueville Gold.
Despite the strong numbers, the broad view is not compelling. Trading volume for U.S. stocks was low until Friday. Enduring bull markets have rising trading volume accompanying rising prices.
Some Reading for You
There was good news this week for current retirees. Social Security benefits will increase 3.6% because of an increase in the Consumer Price Index. Also, Medicare Part B premiums will increase less than expected.
You might not want to read more about the global debt level and its possible adverse consequences. If you do, David Smick is worth reading. He’s a well-respected economist who advises corporations and governments.
There were a couple of good items last week on investing and psychology. These articles explain that many people are hard wired to make poor financial decisions and that you can improve decision making by knowing the details. Read this and this.
October 18, 2011 09:30 a.m.
Your Retirement Finance Week in Review
Markets continue to dance to the tune of policymakers in Europe. The policymakers retreated from view a couple of weeks ago after saying they’ll have a solution by the end of October. That triggered a rally in risky assets and declines in the safe havens of gold and U.S. Treasury bonds. Markets also were helped by some positive, or at least not negative, economic reports. We discuss the latest reports below along with the market action.
Of course, the policymakers resurfaced on Monday and didn’t have good news. They seemed determined to reduce expectations that the plan would resolve the problem. That triggered a sell off in stocks and other risky assets, but also pushed gold down on Monday. The only winner on Monday was Treasury bonds.
I continue to believe it’s prudent to conserve cash and wait for better opportunities. I don’t recommend investing on promises or rumors of resolutions. The debt problem in Europe is significant, and the debt and housing overhangs in the U.S. are keeping a lid on our economic growth.
The Data
It was a quiet week in economic data, but Friday’s retail sales report boosted optimism and caused the stock market rally to continue. It’s a little soon to get excited about this figure and conclude it means we’ll avoid a recession. The retail sales numbers are volatile from month to month. Also, consumers are increasing spending faster than their incomes are increasing. Another caution is that the rise in retail sales is similar to price inflation. The real, after inflation rise in sales isn’t much. Some analysts believe most of the increase came from wealthy people buying from luxury retailers. The bulk of consumers aren’t doing well, and it’s only the wealthy supporting the economy.
The NFIB survey of small business showed a slight improvement in September, but it’s declined so much over 2011 that the improvement is hardly noticeable. Unlike most other surveys and data, the NFIB survey shows what’s happening in small businesses. In normal times the survey’s results are similar to other economic data. But since the financial crisis there’s been a broad disparity in the data. The NFIB survey has reflected the slow domestic economy and weak household spending. Other economic data are more skewed toward what’s happening with larger businesses, and that data for the last few years showed large global businesses are reaping benefits from high growth rates outside the U.S. I expect that the broader economic data will converge with the NFIB survey soon, because global growth is slowing. A key point in the NFIB survey is that expectations of future sales are down, and that tends to reflect future household spending.
Meanwhile, China’s data made some headlines. Its trade data was weaker than expected. China’s trade surplus narrowed for the second consecutive month. That is a reflection of the slowing global economy, and could indicate the slowdown is more significant than many people assume.
Similarly, the U.S. trade deficit was reported to be lower than expected and a small decline from the previous month.
The jobless claims essentially were a non-event. New claims declined 1,000 from the previous week to 404,000. That means they’re still in the range were unemployment isn’t going to change much.
The housing market continues to be a major problem. The latest news is that mortgage default notices spiked in the third quarter. The only good news is that bank seizures of homes declined. But that could simply be a matter of timing or of banks refraining from seizing homes with mortgages in default, because they aren’t ready to deal with the homes.
The Markets
Stocks had a big week. The S&P 500 rose 6% for the week, while the NASDAQ was up 8%. This also was the first two consecutive weeks of rising stocks since July. Treasury bonds declined. Other risky assets followed stocks with gains, such as commodities, high yield bonds, and gold. But the increases in other assets weren’t as dramatic as stock returns. Emerging market stocks rose about 9%. The dollar declined.
The caution is the rally has many hallmarks of a short covering rally. Trading volume with light. In the beginning of a new extended rally trading volume usually is high. In addition, as mentioned, the rally appears to be connected to relief following news of an intended resolution to the European debt crisis.
The next few weeks will be very interesting. We’re entering the heaviest part of earnings season. A number of earnings reports will be issued each day, and stock prices will rise and fall based on how those reports meet expectations and comments management has about their expectations for the next quarter or longer.
In addition, while recent economic data hasn’t been as negative as the July and August data, several respected indicators point to the likelihood of a U.S. recession in the next year.
To buy a significant amount of stocks today you have to believe that everything will work out well in several difficult situations: the European debt crisis; the weakness of European banks; the weak U.S. economy; slowing growth in emerging economies; avoiding another downleg in the U.S. housing market, and Washington policymakers actually getting something done on the cusp of a presidential election. It’s possible, but the probability of all this working smoothly is low. I continue to believe this is a good time to protect your capital and wait for clearer opportunities.
Some Reading for You
The CLASS program, part of the Affordable Health Care Act (health care reform), was quietly shelved by the administration late Friday. We’ve covered this several times in Retirement Watch. The program was intended to provide a daily benefit to Americans who need long-term care. But a provision of the law was that it had to be sustainable for at least 75 years without help from the general fund or other revenues. Actuaries reportedly determined meeting the goal would require a premium of about $2,000 per month.
Steve Jobs liked to wear black mock turtlenecks all the time. Here, reportedly, is why.
Steve Jobs also likely avoided most estate and gift taxes, and we probably won’t know because it’s likely he avoided probate. You can use many of the same tools he likely used. Take a look at the toolbox he considered.
For more reading you shouldn’t miss, check out my public blog.
October 13, 2011 10:15 a.m.
Your Retirement Finance Week in Review
Investors seemed less worried about the economy and the European debt crisis over the last week. The economic data and market action generally were positive. Stock market indexes generally rose 2%. The positive market news continued during Monday’s low-volume holiday trading as investors seemed cheered by an announcement that the leaders of plan to have a plan to solve the crisis by the end of the month.
This could all change, or take another surge in the same direction, as this week develops. This week begins another earnings season, with Alcoa leading off on Tuesday. For a while at least, stocks might respond to fundamentals instead of to political and macroeconomic factors. That probably won’t last until the global debt crisis really is resolved. But it looks like debt will be on the backburner for a while, and the fundamentals will dictate what happens to stocks. The question is whether earnings will reflect the recent downturn in economic data or will continue their record levels despite a weak economy.
The Data
There was a bit of optimism in last week’s data. But taken together the recent data add up to an economy growing close to 0% for the last several months with little reason to expect a surge above that and some risk it could fall below 0%.
It was employment report Friday, and the market always reacts strongly to this report and reads a lot into it. The economy, especially the private sector created more jobs than expected and the unemployment rate held steady. The really positive news was the private sector job growth. The net loss in jobs came from the government sector. Also, hours worked and wages rose. The bad news is this growth rate isn’t enough to reduce the unemployment rate, especially if the large number of discouraged workers returns to the labor force. Also on the negative side was a net loss in manufacturing jobs. The manufacturing sector has been the mainstay of the economy the last few years. The decline in manufacturing jobs meshes with other data for the week. Another negative of the report is about 45,000 of the jobs “growth” was due to Verizon workers returning after a strike.
There were other employment reports issued earlier in the week. The Challenger job cut report showed an increase in layoffs and indicated employers anticipate more layoffs in the coming months. Yet, the ADP Employment Report showed stability with 91,000 new private sector jobs created. That’s essentially the same as for August.
Monday’s Institute for Supply Management manufacturing index increased and was above expectations. But production tends to be a lagging indicator, and we can see evidence of that in the ISM Survey. The new orders segment of the report was under 50 for the third month in a row. Manufacturers have been working on back orders, but without new orders production is likely to fall in coming months. The combination of weak income growth in the U.S. and slowing economies overseas doesn’t bode well for future production growth. We saw evidence of this in Tuesday’s factor orders data, which declined a little.
Auto sales are difficult to interpret right now because of the disruptions caused by Japan’s earthquake earlier this year. There was a sharp drop in sales in mid-year. Supplies were short, so retailers raised prices to avoid running out of inventory. More recently, supplies have increased, and pent-up demand raised sales. Sales are back to where they were before the disruption, but they still are depressed compared to pre-crisis levels.
Construction spending increased in September, but most of the gain was due to public sector spending. Private sector construction remains at depressed levels.
Contradicting most other reports was the ISM Non-Manufacturing Survey showed that growth in new orders is accelerating. Order backlogs also increased, ending three months of contractions. Yet, the survey also indicated no plans to increase employment despite the growth.
Retail sales were another mixed number. Chain stores reported strong sales growth for September, with year to year growth of around 5%. But chain stores reduced their forecasts for sales and earnings, saying consumers are resisting price increases.
The Markets
The markets initially continued the downward trends they followed through September, and then reversed course in the last hour of trading on Tuesday and continued the new trends for the rest of the week. Both U.S. and emerging market stocks rose steadily, registering a weekly gain for the first time in a while. Gold rose modestly for the week, though it had a lot of volatility. Treasury bonds went in the other direction, declining for the week.
Cohen & Steers Preferred Securities & Income triggered our sell signal, so we sold it from the model portfolios. In our Invest with the Winners portfolio, the iShares Barclay 20+ Year Treasury ETF still is above its sell signal, though it is well below the recent high of $125.03.
Some Reading for You
You should read Michael Lewis’ latest piece in Vanity Fair. He reviews how state and local governments arrived at their recent fiscal messes with a focus on California. He interviews Arnold Schwarzenegger and officials in several cities and towns in the state. I think it’s largely accurate of what’s been happening to different degrees around the country.
This week’s economic data didn’t point as strongly to recession as most of September’s data did. But at least two forecasters are saying a recession in coming months is highly likely, the Economic Cycles Research Institute and John Hussman. You should read their reports.
The Forbes 400 issue of the magazine is out. I review what I think are the highlights.
For more reading you shouldn’t miss, check out my public blog.
October 4, 2011 02:45 p.m.
Your Retirement Finance Week in Review
Compared to recent weeks, this was a relatively quiet week in the economy, markets, and the ongoing crises. First, I thank all of you who participated in our investment webinar this past Wednesday. The number of participants continues to grow, and I’m glad to be providing this service. For those of you who missed it, a replay will be available at www.tjtcapital.com starting in a few days.
After a couple of days of pushing markets higher, it appears investors are back in their safety mode. There’s a lot for investors to be concerned about. The European sovereign debt crisis and fiscal mismanagement in Washington continue. There’s still doubt whether the economy can continue generating positive growth. And now it looks like growth in China might be slower faster than people anticipated. All in all, it’s still time to stay in my recommended safe investments while waiting for better opportunities.
The Data
Before we review the week’s economic reports, there’s an important data point to consider. That’s the yield spread between high-yield bonds, investment-grade corporate bonds, and treasury bonds. The spread’s been widening, with high-yield bond rates rising while other rates, especially those on treasuries, decline. That’s usually a warning sign of an economic slowdown or recession. We’ll keep watching that yield spread.
The most significant data for the week was the GDP estimate. This was increased to 1.3% from the previous second quarter estimate of 1.0%. But either number indicates slow growth, not nearly fast enough growth to reduce unemployment or induce businesses to expand.
The U.S. residential real estate market remains a mess, according to the week’s data. New home sales are stagnant are around 300,000 per month, and in August the selling price of new homes declined around 8% over the last year. The fact is new homes are having trouble competing with foreclosures and distress sales. The Case-Shiller Housing Price Index revealed essential steady prices through the summer, but at the end of August prices declined over 4% for the last 12 months. The pending home sales index also declined 1.2% in August. There were declines in contract signing in three of the nation’s four regions, and reports indicate that even after contracts are signed there are problems with getting to closing because of problems with credit and appraisals.
One bright spot in housing is that the Fed’s Operation Twist brought mortgage rates low enough that there’s been a two-week spurt in refinancings and a modest increase in applications for mortgages to purchase homes.
Retail sales continue to grow modestly. Discount stores are doing well, as are many luxury retailers, with other types of retailers having problems.
This was backed up by the Personal Income and Outlays report. In August consumer spending increased modestly (at exactly expectations) while personal income declined. Apparently people dipped into savings to maintain this modest spending growth. Some of that spending was for autos, which was a catch-up in demand that was pent-up because of lack of supply after Japan’s earthquake earlier this year. Overall, as expected, spending is consistent with the poor employment situation. Also in that report inflation is contained, actually coming in below expectations for the month.
Consumer Confidence is mixed in the last month. The overall Consumer Confidence Index was up a bit in August, but less than expected. Also, while consumers overall say the economy is deteriorating, the rate of pessimism for the next six months eased a bit. One-year expectations for inflation also are lower. The overall state of consumer confidence is low, but it is a bit better than in July. The University of Michigan Consumer Sentiment Index also rose a bit, but it still is around the weakest levels since the financial crisis bottom.
The durable goods report for August actually was a good one. This is at odds with most recent reports, and it is important because business capital spending has been one of the few supports for the economy the last two years. Peering into the details of the report, we see that while shipments are up strongly, new orders were slowing down. New orders are a forward-looking indicator, so that could indicate the durable goods numbers will decline with other data in coming months.
The Bureau of Economic Analysis estimated that corporate profits for the second quarter rose at a 4.3% annual rate, which is up from the previous 3.3% estimate.
The Chicago Purchasing Managers Index rose sharply in September. This report indicates there is a sharp rate of growth in both production and inventory growth.
Finally, initial jobless claims fell sharply to 391,000 and were well below expectations. But that leaves the number within the 400,000 range it’s been stuck in for some time, and indicates the employment picture is not improving.
The bottom line is the economy still is growing slowly. We can’t tell from the latest data if we’re going to stabilize around 0% growth or slide into a recession.
The Markets
Stocks wrapped up their worst quarter since the financial crisis with a sizeable drop on Friday. They ended slightly negative for the week, despite sharp gains on Monday and Tuesday and modest gains on Thursday. The gains during the week, I suspect, were the result of traders seeing a short-term oversold condition and investors biting on rumors that European policymakers would solve the debt crisis. The sell off on Friday, concentrated in the last hour, probably was because investors didn’t want to go into the weekend holding stocks.
Gold had a wild week. It ended with a slight gain. The major losses of the previous Thursday and Friday were followed by a sizeable gain on Tuesday, another big loss on Wednesday, and modest gains on Thursday and Friday. Gold was overbought during the summer and needs to go shakeout the speculators before resuming another bull run (unless there is a fresh crisis). I’m hoping it falls to around $1,500.
It was a quiet week for treasury bonds. They were flat for most of the week but had a nice gain on Friday. They’re still below the high point of Sept. 22 but made up a lot of the recent losses on Thursday and Friday.
Emerging market stocks took a pasting along with U.S. stocks this week. The iShares MSCI Emerging Markets Index ETF lost more than 5% on Friday
The dollar also had a good week against both developed market trading partners and emerging economy currencies. Most of the week’s gains were on Friday.
Most of our portfolios other than gold and treasury bonds were flat for the week. We’re still in a period when global capital markets are moved primarily by government actions, rumors of government actions, and fears about big picture issues such as debt defaults and bank failures. This remains a good time to hunker down in safety and the few opportunities that have good risk-reward tradeoffs.
Some Reading for You
Jeffrey Gundlach of the DoubleLine Total Return fund made some news this week with a presentation to some select investmen professionals at the New York Yacht Club. This blog entry is worth your time.
Greece must default. That’s the consensus of economist and market analysts who studied the data. The question is what will the transition be. The longer policymakers wait to develop a solution, the worse the situation is likely to become. Martin Feldstein of Harvard University has an interesting take. He thinks policymakers are trying to delay the default for two years. They think that will prevent a contagion and collateral effects. He doesn’t think that’s a good idea. But he thinks that’s what they’re trying to do.
